If you are like most people; last months home loan interest rate cut courtesy of the RBA seems like a good thing. The official cash rate is at it’s lowest point in decades (2.25%) the Bank’s have passed on the full rate cut; some dropped their rates even further beyond the .25% reduction delivered by the RBA. You should be excited… Yes?? Well it depends on the individual!
Those with an existing home loan should be jumping for joy. The rate cut will mean more money in your pocket each month; or at least will mean you will save a ton of interest if you maintain your repayments as if the rate did not drop (This is a good idea.. more on this later)
You would think that the first home buyer market would also benefit from the latest round of rate cuts. Home loan interest rates drive your monthly repayment amount. The lower the rate; the lower the monthly repayments and vice versa. In some cases these rate cuts do greatly benefit first home buyers because it makes buying a property more affordable repayment wise (see previous sentence). Problem is; the historical low rates also create a massive problem for the the first home buyer market. Their biggest threat are those existing property owners; especially those owners with equity in their property who are now in a position to either upgrade or buy an investment property.
The increase in buyer activity off the back of lower interest rates has the potential to increase property values (and in some cases it has) meaning that the first home buyer market are being squeezed out as they can no longer afford the inflated property prices in Metro Australia. This leaves the first home buyer with two possible options:-
1. Save more of a deposit
2. Move further away from the major city centres to find more affordable housing.
Both options have issues. Saving more of a deposit is achievable but takes time. As time progresses; property values increase. Moving further away from a city centre is also achievable but means longer commute times to get to work (assuming that you work in or near the city) but gets you into the property market sooner rather than later.
It is clear that existing property owners stand to benefit the most out of last round of home loan interest rate cuts. If you are serious about paying off your home loan early; NOW is the time to hit your mortgage hard and pay off as much as you can before the rates rise (and they will rise eventually) If you can maintain the same repayments that you paid prior to the last rate cut you will reduce the amount of interest payable and therefore the term of your loan will also reduce. Make sure you check out my previous blog titled Tips To Pay Off Your Home Loan Faster for more tips.
Important information: The advice contained in this article is for general information purposes only. It has been prepared without considering your objectives, financial situation and does not constitute advice.