March 09, 2017
For seven months running, the Reserve Bank of Australia has left the cash rate on hold at 1.50%, which is a historically low rate for the country. While this has made home ownership more affordable for many Australians, it’s useful to understand how these decisions are made.
Here are the answers to the interest rate questions home owners commonly ask.
Why have interest rates been on hold for so long?
There are many reasons why interest rates have been on hold. The RBA is conservative when it comes to changing the cash rate and local and global economic factors have put the board in a delicate position. While dropping the cash rate would help to stimulate the economy (an important consideration as inflation is currently below a healthy target of 2–3%), it would also add fuel to the Sydney and Melbourne housing markets, where there is ongoing concern of a property bubble.
International factors such as the US economy and the strength of the Australian dollar are also part of this decision. The US is expected to increase interest rates further this year, and it remains to be seen whether the RBA will do the same. Governor Philip Lowe has noted that rising interest rates in the US have eased pressure on other central banks like the RBA to drop the cash rate.
Even though the cash rate is on hold, why are home loan interest rates changing?
Some lenders will move home loan interest rates independently of the RBA. The best example of this is when the RBA cuts the cash rate and lenders don’t pass on the full savings. Even when the cash rate is on hold, some lenders will increase interest rates and there are different reasons for this. If the cost of borrowing increases for a lender, then they will need to make up for this in some way, and this is usually by lifting interest rates.
When there is speculation that rates will rise, demand for fixed-rate home loans does increase and some lenders will try to take advantage of this by lifting interest rates on these loans marginally.
Will interest rates fall any further?
It is hard to read the mind of the RBA, making this a difficult question to answer. Economists expect that rates will stay on hold for the next few months and that a further cut to the cash rate is unlikely.
Governor Philip Lowe has made a point of noting the recent increase in business and consumer confidence, though the RBA does have a number of other factors to account for in making its decision. The economy is also still recovering from decreased mining activity and low interest rates are facilitating this recovery.
Should I fix my home loan?
When the cash rate is low, it’s common to think about fixing your home loan before interest rates start to rise again. Whether this is the right move for you depends on your circumstances. Fixed terms have less flexibility, so if you want to make extra repayments or sell the property within the fixed term, you may have to pay extra fees to do so.
The benefit of variable home loans is that they offer this flexibility as well as a greater selection of features, such as offset accounts and redraw facilities. Whether you choose to fix your home loan or not, there are a number of ways to take advantage of low interest rates.
The Brisbane property market stats you need to know
- Official cash rate: 1.50%
- Brisbane median house sale price: $657,500*
- Brisbane median unit sale price: $462,000*
- Auction clearance rate: 59%
- Home loan interest rates starting from 3.69% p.a.
*These are the latest CoreLogic RP Data figures from January, 2017. They are based on sales data from the Brisbane City Council region only.