How low could rates go?
LAST week we saw the Reserve Bank slash bank rates at a time when many, including me, thought we were at the lowest point; especially after a long period of zero movement.
I am certainly no financial expert, my expertise is based on nothing more than being a typical homebuyer and seller and being surrounded by the world of real estate day to day, but this begs the question — whatever next?
I heard some commentators even say we could head towards a zero rate.
Of course, actual home loan rates sit above this quoted cash rate but, really, could rates actually get any lower for our home loans?
It was only a few years ago securing a rate of 4.99 per cent was an achievement that would have cost $2080 on an interestonly payment per month for a $500,000 loan.
That same loan at the lowest rate I found online today, which was 3.69 per cent, makes the monthly payment $1538 on the same $500,000.
Of course, for most areas of Australia, since that higher rate, house prices have risen and the $500,000 loan doesn’t buy what it did, however this is part of the reason house prices have had the chance to rise, even with very little inflation or increase in typical wage rates.
This also can explain the increase in the smaller lot sizes, an appreciation of units/ townhouses and other more compact living alternatives.
Generally though, house prices have risen, meaning buyers are forced to lower their expectations of what they accept is a suitable buy.
During my home owning decades, allowing for the inevitable ups and downs, the general pattern has been downwards. In 1986, when I bought my first home a typical average variable home rate was at 15.5 per cent.
By 1996, they were slashed to typically 9.25 per cent; a decade later down to 7.3 per cent; and now the typical rate is 5.35 per cent, with so much competition many are able to secure loans for less than 4 per cent.
So what are the signs for the next decade? If this is where you are expecting me to reveal some educated insight, based on highly researched and insider data, I am about to disappoint. What I have observed over the years is that if I can sense impending doom, people in power have likely considered this before I have.
With common home loan rates around 4 per cent, if rates increased over a short period of time by only 1 per cent overall, that hits homeowners repayments by 25 per cent; a rather sobering thought. If the government allowed an economy that generated substantial and quick rate rises, the whole economy would be hit very hard and, in general, our dear MPs, their family and friends all own property — I feel it won’t happen.
I am a huge advocate of fixing rates if the signs are right, it gives you peace of mind, a way to budget and take control of your finances. True you can lose out, but you can win, too, and as long as it is a wellresearched “fix” and it works for you, that certainty can be invaluable.
Is it conceivable rates will go lower? Maybe, but with rates around or under 4 per cent, fixing and planning long term could be worth considering.
My advice is to not allow this rate to lure you into a false sense of security. Don’t think it’s just an opportunity to borrow more than you would normally be comfortable with.
We have the lowest cash rate in history right now. In my opinion, there is a chance it will linger around this level for a year or two. If it reduces further, the market will continue almost as it is now, in business-as-usual mode, but the first rate increase may cause real panic.
That is why I suggest keeping affordability in mind and expecting and allowing for some rate increase along the way.
Andrew Winter is host of on Lifestyle