Lower Interest Rates in 2020 – What Effects Will They Have for Australian Investors
The effects of the RBA’s cash rate cuts at the end of 2019 and Feb 2020 will be wholly felt throughout the next few years. Find out what this means for investors.
In March 2020, the Reserve Bank of Australia (RBA) decreased the cash rate once again. And this time, they hit 0.5%, which is a new record for lowest ever cash rate.
Over the past decade, the RBA’s cash rate has mostly gone down in one direction, as presented in the following chart:
What this means is that interest rates have been going down during this time as well.
The cash rate is the cost of overnight loans that banks in Australia have to pay. Thanks to the lower cost, banks and lenders can turn around and charge consumers lower rates for loans, including mortgage loans.
Needless to say, this affects Australian Investors in a number of ways, besides lower costs of lending. The most impactful effects are as follows:
# 1. Higher House Prices
Since 2008, house prices all over Australia have been surging. This is especially true for some of the biggest markets, such as Sydney or Melbourne.
As a result, many aspiring investors haven’t been able to get their foot in the door. And those who did may have had to spend beyond their budget.
The RBA rate cuts have a lot to do with it. With easier credit comes more investment activity. And the demand drove up house prices.
This can certainly benefit existing investors, of whom the shrewd ones might have positioned themselves for higher returns.
For budding investors, on the other hand, the rate cuts may not have been good news.
The high entry barrier in many markets is only going to go higher. The price correction of the past few years appears to be nearing an end, and even stabilised, as per some experts. House prices are set to pick up once again, if not already.
But it’s not all bad, really.
Rate cuts have a host of effects, many of which are beneficial. Or else, investors all over the world wouldn’t have cheered on their central banks to cut rates.
# 2. Possible Lower Rates on New Home Loans
Of course, a lower cash rate readily translates to lower interest rates for loans.
This would counter higher home prices to an extent. New investors may have to borrow more, but it should also be easier in terms of both cost and ease of approval.
However, not all lenders will adjust the interest rates for the loans that they give out just because their costs are cheaper. They also may not give you the full 25 percentage points that they’re saving on the cash rate.
A good number of them will adjust the loan interest rates sooner or later, though. They wouldn’t want investors to go to their competitors that offer lower rates.
# 3. Those Who Have Variable Rate Loans Should Benefit
If you have an existing mortgage loan or two, the latest RBA rate cut might result in lower interests and thus, lower monthly payments.
That’s assuming that the mortgage comes with a variable rate. If that’s the case, you can expect to have lower repayments in the foreseeable future.
One of the reasons for going with a variable interest rate is to hope for it to go down in the future, which is, in large part, dependent on the RBA’s cash rate. As low as the cash rate had already been, it went down further by another 0.25% in October of last year.
However, if your mortgage has a fixed rate period, you’ll have to wait until it expires.
If you’re tied down to a fixed rate for a long time, it doesn’t mean that you can’t save money off recent and future cash rate cuts. You just have to refinance your current home loan to save money.
In light of the recent rate cut, you can shop around and see if there’s a better deal out there.
# 4. Potential Lower Interest on Savings Accounts
A lower interest rate cuts both ways.
If you’re earning interest, the amount is likely going to go down after a cash rate cut.
If you keep money in an account that earns interest, such as a savings account or a money market fund, you’ll have a lower return. That’s also true if you have to get a new term deposit. And all of this may impact your ability to save for a deposit.
Because of this, it’s worth checking if your bank has made any changes to the interest rate that you’re earning. Once again, it might be time to compare rates. Another bank or mutual fund company may offer better rates.
# 5. More New Developments (Thus Creating More Supply)
Since a lower cash rate is likely to spur economic and investment activities, this is going to motivate developers as well.
They’ll be more eager to green-light new developments in the hope of profiting from this.
This means that the supply of new properties is likely to go up. And any increase in supply in an area will put downward pressure on the prices, especially of similar properties. After all, hyper-construction and oversupply had a hand in the recent downturn.
That’s just another thing to look out for after the latest cash rate cut.
A Window of Opportunity
Experts and analysts are predicting that the Australian property market will recover over the course of 2020. Concerned about the slowing economy, the RBA’s latest rate cut should help investors and the property market.
That’s assuming that the economy doesn’t take a turn for the worse.
There are other factors that can affect the Australian economy and property market, but at the moment, the climate looks favourable for new investors.
Furthermore, property prices are also more affordable nowadays after the recent decline. But that’s only if you can beat the majority of investors to the punch.
Are you ready to take advantage of this opportunity? Contact us today to find out how we can be of help.