We look at how the RBA rate cut and the APRA change to the interest rate buffer might help property buyers and existing owners.
RBA rate cut
Earlier this month the Reserve Bank (RBA) cut the official interest rate. Commonwealth Bank and National Australia Bank passed on the full rate cut of 25 basis points. ANZ and Westpac passed on some of the rate cut and a number of smaller banks have followed.
- On a $400,000 standard variable loan, a borrower might save around $686 per year.
- If it is an interest-only loan, the savings would be around $1,000 per year.
These savings may sound low compared with the loan size and payments but could help pay off your loan sooner. If the saving of $686 was paid into the loan every year instead of keeping it in your pocket, you could pay off your loan a whole two years earlier.
Why did the RBA cut rates?
One of the main reasons was to stimulate employment growth. When rates go down, businesses feel more confident to expand because it’s costing them less in interest to finance their expansion. With expansion plans and increases in turnover, businesses need more staff and so the cycle of employment growth starts.
APRA changes to interest rate buffer
The Australian Prudential Regulation Authority (APRA) proposes to reduce loan interest rate buffer requirements to 2.5% over the actual loan interest rate. This means, where banks typically calculate a home buyer’s borrowing capacity using a 7.25% interest rate, on a 3.99% loan it might be calculated using a rate of 6.49% after the change.
What difference does the APRA change make? **
A borrower who now qualifies for a loan of $400,000 could qualify for $433,000 after the change to the interest rate buffer. If the 25-basis point rate cut is also applied, the borrower could qualify for $444,000. That is $44,000 extra and makes a great difference in the choices available to the buyer. It could mean getting into their preferred suburb or having that extra bedroom they need for their kids.
How do these changes affect the Perth property market?
The Perth property market has been struggling since its peak in 2004. Now, the interest rate reduction together with APRA’s proposed relaxation will be a great boost. But on their own they are not enough to kick start the market.
The positives, though, are starting to accumulate, with the latest good news drivers to nudge the market forward being
- Banks to soon loosen up after too-tight lending had pushed many buyers out of the market
- Competition has recently seen many small lenders drop rates to well under 4%, sometimes even below 3.5%
- Further reductions due to drop in official rate
- LNP win at the election keeping negative gearing and capital gains intact
- WA economy grew 9% last year – a pre-cursor to jobs growth
- WA exports grew significantly, with iron ore prices at a high
- Infrastructure WA to boost the state economy and jobs growth
- Rental occupancies on the way up paving way for rent increases
- Properties now more affordable than ever
- A surge in mining jobs – almost 90,000 full-time
- WA is 2nd most attractive place in the world for mining investment
For a property price recovery to get going in full swing we need to see more first home buyers providing a lift for people to trade up; we need to see the benefits of the mining jobs growth and an improvement in employment across the board. In the meantime, it’s critical to be selective and do thorough research as there are several pockets of areas and property types that are doing well.
It’s also vital not to wait too long and potentially miss the boat. Many buyers discovered this to their detriment in the previous upturns as they waited for certainty and media confirmation, which comes long after the ship has sailed.
(*$400,000 loan, principal and interest for 30 years, repayment at interest rate of 3.99% is $1,907.36 pm and at 3.74% is $1,850.19 pm, a difference of $685.95 pa. For interest only on a $400,000 loan, at 3.99% it is $15,960 pa and at 3.74% it is $14,960 pa.)
(** $400,000 loan, principal and interest for 30 years, assessed on income of $68,000pa at interest rate of 7,25%; then at 3.99% rate plus buffer of 2.5% which is 6.49%, then at 25bp cut which is 6.24%.)
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