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2020-02-21 Property Tips
Author: Satterley

RBA interest rate first home buyers

Come the first Tuesday in every month business journalists get themselves into a first class lather, the money experts sprout pronouncements at light speed and smoke emits from the economic gurus’ crystal balls.

Yes, it’s the monthly meeting of the Board of the Reserve Bank of Australia or RBA, to  determine whether or not to move official interest rates up, down, and by what fraction of a percent, or not at all.

For the uninitiated, an important reason for the RBA to alter its official interest rate is to try to keep the nation’s economy heading in the right direction.

To explain, if Australia’s economy isn’t firing on all cylinders, the RBA can lower its official cash interest rate, which in turn influences borrowing and deposit interest rates offered by banks and other lending institutions. For mortgagees, repayments are usually reduced, leaving more money each month to spend. And for those looking to borrow, qualifying for a loan should become a little easier to. All of this is designed to stimulate spending and investment in the economy, meaning more jobs and more taxes for the government. 

In practical terms, a drop of one quarter of one percent  from, 5.00% to 4.75% on a 30 year variable rate home loan of $350,000, means you get to keep an additional $53.00 per month or almost $640 per year in your pocket. 

The Reserve Bank of Australia has set the current official interest rate at 0.75% (as of February 2020)

But, if things get ‘too happy’ and prices increase too much or too quickly (i.e. inflation), the RBA can chill things out by increasing its rates, thus affecting those charged by banks and financial institutions thus affecting the affordability of new loans for land and houses, cars and other major household items. Existing variable rate borrowers also usually need to dig deeper to repay mortgages or personal loans. Not so happy days with less money likely to be spent around the town.

As the Australian economy hasn’t been firing on all cylinders of late the RBA cut interest rates three times in 2019 with the aim of revving up consumer spending. Although there are some early indications that this is having the desired effect, genuine signs of improvement are still in the works.

And while there’s always lots of ‘noise’ about the current interest rate cycle, it’s worth noting that the standard variable interest rate is at record lows. Not only is it almost halved from the 2009 rate of about 9.3 percent, but it’s now back to where it was in the 1960's. 

Many people anxiously await the RBA's monthly board meeting and decision

A ‘leg-up’ for house and land and home buyers

In addition to today’s ‘basement level’ interest rates working for prospective home owners and investors, federal and state governments have initiated schemes aimed at putting helping people into their first home.

Federal Government First Home Owners Deposit Scheme

The FHOD scheme aims to help people purchase a home with a deposit of as little as 5 per cent without needing to pay for lender’s mortgage insurance. In just one month 3,000 of the available 10,000 deposits were snapped up by prospective home owners. Added to this a further 10,000 deposits are scheduled to come on stream at the end of this financial year. 

State and Territory Government Grants

Continuing from before the FHOD are a range of grants – some up to $20,000, as well as stamp duty and rates concessions that are being offered to land buyers, new home owners and buyers of existing homes. Each state has its own conditions and criteria but there’s plenty of opportunity for those on the hunt.

Developers and Builders

On top of state and federal assistance many of the nation’s top property development and home building companies are offering buyers significant house and land discount packages – up to $30,000 in some cases - to qualified buyers.

And while the sticker price for real estate might seem to have risen substantially over the years, research published by realestate.com.au shows that between 2008 and 2018 average weekly earnings rose at just over three times the rate of the monthly average loan repayment for a 25-year variable rate loan.

For buyers in Sydney and Melbourne, adjusting your timeframe and/or location horizons might be warranted if property prices and interest rates stay around current levels. As a short term measure buying outside of blue ribbon areas at a lower price might at least gets you into the game with a modest prospect of building some equity down the track.

Elsewhere, there are some nascent positive indications with upticks in new and established home sales and rents, albeit Perth and Darwin are still suffering big hangovers from their massive resources infrastructure construction booms in the noughties.

Whichever way you choose to jump make sure to shop around when it comes to borrowing money. It’s a highly competitive market nowadays, whether you go direct to the banks, enlist a mortgage broker or call on the ‘bank of Mum and Dad’

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