By the time we got to Tuesday this week there were no prizes for guessing the right answer
By the time we got to Tuesday this week there were no prizes for guessing the right answer, but the Reserve Bank of Australia has indeed cut the official interest rate, for the first downward movement since the cuts of late 2020 as COVID restrictions were at their height.
After a phenomenal 13 increases between May 2022 and December 2023 that effectively doubled (or tripled) residential mortgage rates over the period, we finally have some blue sky and relief for borrowers, provided that their banks pass the rate cut on in full.
Now, a quarter of a percent is not going to change anyone’s world – though I am sure no-one will sneeze at the extra $100 back in your pocket every month (based on a $500,000 loan). The significance here is that it is a positive sign of things to come, with the general consensus being that 2025 should see somewhere between 3 and 4 cuts in total, for a potential reduction of 1% this year and a $5,000 per year saving based on that same loan balance.
Aside from helping existing mortgage holders claw back something against a cost of living crisis (and let’s face it, you’ve got to be grateful for every bit of help you can get!), a lower interest rate will also serve to re-invigorate an already active property market, as active buyers are empowered to stretch their budgets that bit further, and those on the fence of affordability get just enough of a nudge to tip them into the market as well. Because working back from the saving on an existing mortgage, that’s an extra $5,000 a potential buyer is now in a position to afford, compared to before. That could make a big difference for what they can borrow, fuelling further price growth in an already incredibly tight market.
I saw that level of competition in full swing just over a week ago, with a 1 bedroom unit seeing 8 offers submitted inside a week, with the final price blowing away owner (and our) expectations and resetting the benchmark for a similar property. With the top 2 offers separated by less than 1% though, it was clear this was less a fluke than active buyers once again feeling the FOMO and recognising that in light of cheaper interest rates, a strong price today might look like great value 12 months from now.
While we keep our fingers crossed that this is just the first rate cut of many, don’t sit on your hands with your bank. If you don’t hear an announcement about their intentions to pass on this (and any other) rate cuts, then make sure they hear from you about where you’ll take your business.