What does the latest interest rate cut mean for property investors?

Earlier this month the Reserve Bank lowered the cash rate by 25 basis points to a historical low of 1.75 per cent. With slowing inflation, now at a very low 1.3 per cent annually, the interest rate cut was intended to stimulate the slowing economy, increase inflation, and incentivise spending and investment.

Interest rates are now the lowest they have been in 41 years. What will the interest rate cut mean for property investors?

Mortgage repayments will become more affordable

For property investors and owners, the drop in interest rates will mean greater mortgage affordability with cheaper repayments on future fixed home loans, and future or current variable home loans.

Even a small reduction on a home loan rate can lead to thousands of dollars in savings over the life of the loan. Before the interest rate cut, the average standard variable mortgage rate was 4.77 per cent, and with the interest drop will now fall to 4.52 per cent. On a 25-year home loan, that could lead to significant savings month to month as outlined below.

Savings on monthly repayments with an interest rate at 4.52 per cent

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Falling property values will slow

If the interest rate cut has the intended effect, it will stimulate the economy which will have flow on effects for the property market. While property prices have been falling of late, we can expect this to ease a little, as buyers are incentivised to enter or re-enter the market. However, a sharp increase in prices is unlikely.

Will there be another interest rate cut?

If the current performance of the Australian economy continues as anticipated, we can reasonably expect that interest rates will continue to be used as a lever to increase inflation and as such will drop once again.

Commentators are anticipating that the cash rate will be cut again to 1.5 per cent by October 2016 with a strong chance of a further cut in May 2017. Interest rates are expected to remain low for a couple years at least before they rise once again around 2018.

Is now a good time to invest in property?

Low interest rates offer a great opportunity for property investment. The key to making a savvy investment choice is to weigh up all factors including your financial situation and the performance of various property markets. Consult with experts such as your mortgage broker to guide you through the property investment journey.

To discuss how low interest rates can support your property investment goals, contact me on 02-9522-3000 today.

 

 

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