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RBA holds cash rate, here’s why home buyers still aren’t benefiting


Refinancers can save big but for buyers hoping to enter the market, low rates mean little when prices are so high.

The Reserve Bank of Australia held the official cash rate at 0.10% at its meeting today. All of the experts in Finder's RBA cash rate survey predicted this decision.

Interest rates for borrowers have never been lower (the cash rate has a big impact on how lenders price their rates). But the low rate environment has existed for some time now, and it has driven property prices to new heights.

"Housing markets have continued to strengthen, with prices rising in all major markets," said RBA governor Philip Lowe. "Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers."

According to the latest CoreLogic figures, Australian property prices have grown 16.1% in the last 12 months. The median property price in Sydney is now over $1 million.

There are several reasons for soaring home values, but low interest rates are a big part of it. Low rates make it cheaper for buyers to borrow money. But it also enables many of them to borrow more money. This inevitably fuels prices.

And prices have now risen so much that the savings that come with lower rates have essentially been wiped out. Money is cheaper to borrow, but the median buyer needs to borrow so much more.

12 months ago, the median Sydney property price was $875,749. The lowest home loan rate in Finder's database was 2.09%.

Today, the median in Sydney is $1,017,692. The lowest rate in Finder's database is 1.67%. In other words, the growth in prices has far outstripped the change in interest rates.

Here's a quick example using the interest rates above:

  • 2020: You borrow $500,000 over 30 years with a rate of 2.09%.
  • Your monthly repayments = $1,870
  • Total loan cost = $673,445

Now let's try the same calculation in 2021 with a lower rate. With 16% price growth, you now need to borrow $580,000.

  • 2021: You borrow $580,000 over 30 years with a rate of 1.67%.
  • Your monthly repayments = $2,049
  • Total loan cost = $737,766

This will cost you an extra $64,000 in interest over 30 years. And that doesn't even take into account stamp duty, which rises the more you borrow.

Today's cash rate decision is good news for anyone who already has a mortgage. Low rates benefit you, and if you can switch to a lower rate loan you'll actually save money.

It's the people hoping to enter the market who are being left behind.

Save money on your home loan – check out our home loan refinancing guide.

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