HOW HOMEOWNERS AND HOME BUYERS TAKE ADVANTAGE OF LOW INTEREST RATES
- Posted By Prince Lakshman
With the Reserve Bank’s cash rate to remain at an all-time low of 0.75 per cent, homeowners who are still tied up on a mortgage can take advantage of this time to strategically pay them in bulk.
The most recent rate slash could also mean that borrowers will have more borrowing power. So if you are a household with an annual income of $150,000, you still have another $12,000 to $14,000 to borrow.
This gives buyers the ability to purchase properties with higher values or enter the market fast. However, buyers should control their expectations before signing the deal.
“Any increased borrowing capacity is translated into increased house prices,” said Domain research analyst Eliza Owen.
“Interest rate cuts have had a significant impact on the property price rebounds in Sydney and Melbourne,” she said. “The finance data from the ABS suggest that this rebound has been particularly strong amid the owner-occupier segment.”
Loose lending standards have increased buyer’s borrowing capacity and post-election confidence have boosted demand for property.
Combined with a reduced supply of homes for sale, these factors have caused a sharp turnaround in prices in Sydney and Melbourne.
Sydney’s median sale price is still 8.5 per cent lower than the December 2017 peak, and Melbourne’s median is 6.5 per cent lower than the June 2018 peak. Still, economists predict prices to continue rising faster than previously expected over the next 12 months.
The real winners from the low rates are the existing homeowners, while first home buyers may find prices surging once again.
Homeowners take advantage of low interest rates because of lower repayments. This improves household budgets because more cash will be saved up, invested, or used in discretionary spending.
“A home owner benefits more from changes in the cash rate cut because their asset value is likely to go up and they may be able to refinance at a lower rate,” Domain research Analyst Eliza Owen said.
Refinancing is the most effective way to take advantage of a low rate environment. Homeowners who haven’t asked for lower rates from their lenders are paying too much, according to Canstar group executive of financial services Steve Mickenbecker.
“The reality is most existing borrowers who have been in the market for a few years aren’t getting the lowest rates around,” he said. “They’re getting rates around the 4 per cent mark. We had listed over 400 loans with rates below 3 per cent.”
According to a Canstar analysis, a borrower owing $400,000 with a 3.86 per cent interest rate will save $93,794 in interest over the life of the loan if they switch to a product with a 2.86 per cent interest rate after three years.
In the same scenario, a borrower who switches to a lower rate and continues to make the same repayments will pay off their loan four years and two months earlier.
The cheapest variable rate in the market was 2.69 per cent, according to Canstar.
To get the lowest rates, home owners need to present themselves as the most desirable customers to banks, Mickenbecker said.
“You’ve got to behave like you’re a new borrower, and approach them for a better deal,” he said. “People who can repay their loans, with reasonable equity in their property and good credit history; banks are really chasing that business hard.”
Home owners who are ahead on their mortgage, have surplus cash in an offset account or a healthy loan to value ratio may find that a low interest rate environment is an ideal opportunity to put their equity to work.
“It’s generally positive for the property market,” Oliver said. “Investors bring forward plans to buy property, and owner-occupiers think about upgrading, obviously all with a view to taking advantage of low rates.”