Larger home loan sizes may counteract low interest rates
- 100% of experts (31/31) tipped that the cash rate would be held at today’s RBA board meeting.
- 68% of economists expect a cash rate cut this year; 60% think it will fall to 1.50% this cycle.
- Correlation between cash rate cuts and a surge in loan sizes means borrowers should be careful.
- Borrowers urged to factor in 2-3% to prepare for a potential rate rise.
7 June, 2016, Sydney, Australia – As widely tipped, the Reserve Bank held the cash rate at 1.75% at this afternoon’s board meeting, but borrowers shouldn’t be lured by a low rate environment as a cash rate cut often precedes a surge in loan sizes, according to finder.com.au, one of Australia’s largest comparison websites.
100% (31/31) economists and experts in the finder.com.au Reserve Bank Survey accurately predicted this outcome which follows the surprise cash rate cut to a historical low of 1.75% last month (May), which marked 12 months since the last cash rate movement.
However, the verdict is that there’s a further rate cut on the way, with 68% of economists expecting one this year. Most are expecting the cut to happen in August, with November and then September being nominated as the next likely months for a rate cut.
Of those experts who weighed in on how low rates would drop this cycle, the majority (60%) predict a low of 1.50%, while 12% think there’s scope to fall beyond this.
Bessie Hassan, Money Expert at finder.com.au, says borrowers shouldn’t get caught up in the hype of this historically low rate environment.
“While we’re seeing some of the lowest home loan rates ever, the message to borrowers is clear – don’t take on too much debt”, she says.
New analysis of ABS data by finder.com.au suggests home loan sizes will increase with the latest cash rate cut last month. Interestingly, in five out of the last seven rate cuts, home loan sizes increased the following month.
The average loan size increased by 0.73% in June 2012, 0.86% in June 2013, 1.87% in September 2013, 1.84% in March 2015 and 1.78% in June 2015, all of which were months following an RBA cash rate cut.
However, the average loan size decreased by 0.17% in July 2012, 0.49% in January 2013, which were also months following a cut.
This correlation between cash rate cuts and an increase in home loan sizes suggests that some borrowers may be borrowing more money to buy than they realise.
The current home loan size nationally is $357,500, which has fallen from a high of $386,300 in November 2015. However, based on the average movement over the last seven rate cuts, we may see the average home loan size jump by 0.92% in June.
Ms Hassan says that borrowers, and especially first home buyers, should be careful about not rushing into the market too quickly.
“There can be a danger in feeling too comfortable, particularly for those new to the market, such as first home buyers.”
“While you may be enticed to take up a home loan in the current environment, only do so after doing your research – and this includes factoring in future rate rises.”
These historically low rates are not here to stay. Two in five (39%) experts are predicting a rate rise beyond 2016.
“Despite this low rate market, don’t jump in without adding a buffer of 2-3 percent to your current finances – this should have you covered if or when the cash rate increases.”
“Should the cash rate rise by 0.25%, you’ll be paying approximately $50 per month more for a $300,000 loan size – and potentially, thousands of dollars more over the life of your loan.”
“Thinking ahead may save you from a nasty shock a few months into becoming a homeowner.”
Our experts weighed in on the June RBA cash rate decision:
Shane Oliver, AMP Capital: "While I expect the RBA to cut the cash rate again this year, not enough will have happened to bring on another move by the June meeting."
Peter Munckton, Bank of Queensland: "We have had no new information to change RBA's view that 1.75% is the right rate."
Richard Robinson, BIS Shrapnel: "The last cut successfully engineered a fall in the dollar, which the RBA desired. Although inflation is low, deflation is unlikely (oil prices have already risen sharply since January), and the economic growth is sufficient to prevent a marked increase in the unemployment rate. Better to leave some rate cuts for later – when they might need them."
Chris Caton, BT Financial Group: "The Bank may cut again but it is not in a hurry."
Dr Andrew Wilson, Domain Group: "RBA to take a wait and see approach after last month’s cut with data remaining mixed. Inflation critical but bias remains solidly for another cut this year although a near-term rise in US rates may stay the RBA hand."
Scott Morgan, Greater Bank: "The RBA will wait to see the impact of the most recent cuts. There is no recent economic data that would change the RBA's view."
Mark Brimble, Griffith University: "While bias remains to easing, the RBA is likely to tread carefully and wait for the reaction to the previous month’s rate cut to emerge and further data in relation to confidence, inflation, lending and capital expenditure prior to easing again."
Mandeep Sodhi, HashChing: "RBA would want to wait till August 2016 to see the flow on effects from rate cut in May 2016. The July 2016 election results will also give some clear directions and would make sense to wait till August 2016. There are no compelling reasons for RBA to change the interest rate in immediate short term. This is a good time for existing homeowners to revisit the interest rate they are getting and negotiate a better rate from existing lender. Home owners do not need to wait for another rate cut in this competitive market where lenders including big 4 banks are offering home loan interest rates below 4% p.a."
Jason Spencer, homely.com.au: "The Australian economy is looking stronger, global issues are dissipating and the Australian dollar is falling so rates should remain on hold on June 7."
Shane Garrett, Housing Industry Association: "The RBA will take time to assess the consequences of its May rate cut as well as possible developments in inflation before moving on rates again."
Paul Bloxham, HSBC: "They just cut last month and, in our view, will want to see the Q2 CPI print before considering a further move."
Michael Witts, ING Bank: "Given low inflation was the driver behind the May decision we would suggest that the RBA will look for further data on this front."
James Boyle, Liberty : "It’s hard to ignore the downgraded inflation forecasts the Board issued earlier in the month, although I still don’t see another cut coming until at least August. This is despite jobs growth and unemployment remaining modest, but steady, and wage growth continuing to slow. The Board will no doubt be monitoring the impacts of the last rate cut on the country’s stronger property markets. Auction clearance rates in Sydney performed strongly on back-to-back weekends in May, while Melbourne is seeing listing numbers similar to the same time as last year. First home buyers and investors are returning to the market with the promise of lower interest rates – and this is improving the outlook for the sector. At the same time Mr Stevens has expressed that there is a bit of flexibility in the RBA’s inflation target, so we’re likely to see the cash rate hold for a few months, despite inflation being low, to see if other improvements come about. Economic recovery abroad in the US and Europe is tipped to be slow and steady over the coming years and I don’t foresee Australia being any different.”
Grant Harrod, LJ Hooker: "The RBA will now monitor the effect last month's rate cut has on the economy. Lending institutions continue to de-risk the housing market by raising rates to investors, and limiting borrowing by non-resident buyers. This is resulting in price growth moderating and also allows the RBA to cut rates further, later in the year, as needed."
Stephen Koukoulas, Market Economics: "Economy doing reasonably well – no need for further monetary policy stimulus."
John Caelli , ME: "Having just cut, the RBA will likely hold until August to assess CPI figures before cutting again to confirm their initial assessment. The RBA continue to target inflation within a 2 to 3% band over the longer term."
Mark Crosby, Melbourne Business School: "Having just cut, and with the US likely to raise there is no compelling reason to cut despite low inflation numbers."
Effie Zahos, Money Magazine: "The next inflation report isn't due until July 27 so it could be a case of hold steady until August."
Emily Dabbs, Moody's Analytics: "The central bank will likely wait to see if the May rate cut has bolstered domestic demand and put upward pressure on inflation. Further rate cuts are likely down the track."
Jessica Darnbrough, Mortgage Choice: "There are a couple of reasons why the Reserve Bank may choose to leave the official cash rate on hold this month. In the first instance, unemployment remains low, sitting at 5.7%. Secondly, consumer sentiment has improved significantly over the last month - both of which are positive signs for the broader economy.”
Christopher Schade, MyState Bank: "There's no urgent need to deliver another cut to the Australian economy with the Australian dollar weaker, the economy going OK and May's cut requiring some time to work through the economy. It is more likely the RBA will take some time to see how the Australian economy and global conditions develop over the coming months before making any further changes to the cash rate."
Saul Eslake, Independent Economist and Financial Commentator: "They have responded to the lower-than-expected CPI, the currency has since fallen quite a lot, their other forecasts for economic growth and unemployment haven't changed, no need to lower rates again."
Alan Oster, NAB: "Too early to judge inflation and non mining outlook."
Jonathan Chancellor, Property Observer: "The last move is enough."
Matthew Peter, QIC: "Having cut in May, the RBA will await the next read of inflation in July before deciding whether to cut another 25 basis points."
Noel Whittaker, QUT: "[The RBA are] awaiting the outcome of last cut"
Angus Raine, Raine & Horne: "The RBA made a big call in dropping interest rates last month, and with the Federal Election on the horizon, I don't expect any movement this month."
Nathan McMullen, RAMS: "Further assessment of impact of recent monetary easing required."
Janu Chan, St.George Bank: "The RBA will choose to wait a while after the decision to cut rates at its last meeting. "
Scott Pape, The Barefoot Investor: "The cuts are coming… just not this month."
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