RBA holds the cash rate: Why that means low interest rates and higher house prices
When mortgage rates stay low, it's cheaper to borrow money. This means refinancers save, but it drives buyers to borrow more and pushes up prices.
At its first meeting in 2021, the Reserve Bank of Australia (RBA) has today decided to hold the cash rate at the all-time low of 0.10%. Every expert in Finder's cash rate survey saw this one coming.
Out of 27 experts surveyed, only two think the cash rate will rise any time in 2021. The RBA itself has signalled the cash rate will stay low for a while.
And that means Australians who already have mortgages should shop around for a better deal with a lower interest rate. For first home buyers, however, the benefit of cheaper borrowing costs also means more people are likely to buy – and borrow more to do so.
Lower mortgage rates make money cheaper
The RBA decides the official cash rate, which is a single interest rate figure that has a big effect on lenders' costs when they borrow money. This includes the money lenders need to fund borrower's variable rate home loans (most lenders don't have enormous piles of cash ready for the exact moment a borrower buys a property).
And when a lender's costs fall, they can choose to pass these costs onto borrowers. And in recent years they have.
Here's how the cash rate has fallen over the last two years.
In June 2019, the cash rate, which had been sitting at 1.50% for a long time, began to fall. It has continued dropping ever since to the present, historic low of 0.10%. That's a cumulative cut of 140 basis points.
This has caused home loan rates to fall significantly as lenders compete with each other. But lenders tend to keep their lowest rates for new borrowers only. If you want to get a lower rate, you may need to refinance your home loan and switch to a better deal.
Here's how much you could save. Let's say you have a $400,000 home loan over 30 years. Your interest rate is 3.70%. That wasn't bad in 2019, but it's very high today. What if you got a new rate that took into account the cash rate cuts of the last few years? That is, a rate that's 140 basis points lower at 2.30%.
- Loan repayments at 3.70% = $1,841
- Loan repayments at 2.30% = $1,539
On a $400,000 loan, that lower rate would save you $302 a month or $3,624 a year.
For borrowers, the RBA's decision to hold the cash rate at its lowest point is a big win.
Cheaper credit causes higher prices
Lower interest rates are also good news for first home buyers – up to a point. As money becomes cheaper to borrow, people inevitably borrow more of it. This tends to drive house prices up.
CoreLogic price data from the end of January 2021 shows that nationally, property prices have surpassed their pre-COVID-19 peaks. And this trend only looks to be going up. This is partly because "Advertised supply levels are low while demand is strong", according to CoreLogic research director Tim Lawless.
In other words, the supply of properties listed for sale is relatively low compared to the number of buyers.
But low interest rates have a strong effect too. The RBA's own modelling, from a recent piece of internal research, suggests that housing prices can rise as much as 10% per year with a 100 basis point reduction of the cash rate.
The official cash rate has fallen 140 basis points since 2019 and doesn't seem likely to rise in 2021. Hopeful home buyers may need to move fast.