Where to next for interest rates?

Where to next for interest rates?

Quite a bit can happen in the space of a few weeks when the world is dealing with a disease pandemic.

In mid-February, the vast majority of economists felt it was highly unlikely the Reserve Bank would cut interest rates again at its next meeting. But come the first Tuesday in March and there were little else that could be done. A sluggish national economy, global market slumps due to coronavirus and uncertainty about what’s coming around the corner, all prompted the RBA to lower the official cash rate again to a new record low of 0.5 per cent.

And it’s likely we’ll see another historic movement downwards in the coming months. Should all of this make property buyers nervous? It’s what I’m being asked a lot in recent days. Record-breaking low rates can’t be a good thing… right?

Well, let’s start with some immediate good news from the March cut, being that the big four banks passed on the 0.25 per cent reduction in full. How often does that tend to happen?

It was a welcome decision that many of the smaller lenders followed, with only a few – Bank of Queensland and Heritage – not giving customers the full reduction.

For someone with a $400,000 mortgage, receiving the cut in full will save them about $680 every year, or for a loan size of $500,000, a tidy $850 a year. This will put more money in pockets and hopefully instill a bit more consumer confidence, as well as easing cost of living pressures.

Lower rates also significantly increase your borrowing power. If you’re shopping for a new home or investment at the moment, you can now take out a bigger mortgage because the cost of credit is much cheaper.

Getting more bang for your buck is always a good thing!

But as the Brisbane market continues its recovery trend, with price growth for both houses and units in a number of inner-ring suburbs, borrowing power will be crucial for those would-be buyers looking to get onto the ladder sooner.

This leads to another big positive for borrowers and sellers in the short term.

The less interest that banks can charge, the slimmer their profits will be, and the more disgruntled shareholders are likely to feel.

The solution to this? Volume. Lots and lots of new customers. If banks can’t make as much from one mortgage holder, it’s in their interest to grow the size of its customer base.

So, expect some pretty enticing deals on home loan products as competition intensifies.

And in the medium term, all of these things will combine to bring a lot more first home buyers, upgraders and investors out into the light as well, particularly as they’re turned off share markets while they’re being pummeled on an almost daily basis by coronavirus fears.

Watching the ASX follow the lead of US and Asian markets and shed huge amounts of value won’t be fun for too long, and so buyers will soon turn their attention back to bricks and mortar, which is great news for sellers.

And all of that renewed activity and confidence will lead to an uptick in construction activity, which will be good news for the Australian economy.

So, eventually, everybody wins.