1% Rate Cut by End of the Year

Depending on how much news you consume, you might have come across articles mentioning interest rate cuts coming this year, as the underlying inflation figures are looking healthy for Australia. Some have even mentioned a full 1% drop by the end of the year.

Now, without giving you an economics lesson, the Reserve Bank (the peeps who control interest rates) has said they won’t be cutting rates until inflation (the cost of things going up) is at a satisfactory level.

We’re now at the point where inflation numbers are looking good, and with everything happening overseas mainly in the US with tariffs the RBA is expected to drop rates at their next meeting, which is this month, May 20th.

What Will the Expected Rate Cut Be?

There are mixed views on how much the cut will be, as the standard isn’t always 0.25%. This round, many are saying it could be 0.50%.

Now, in my opinion, they’re quite conservative, so why would they push so hard? However, since the RBA is meeting less frequently than in previous years (8 times now instead of 11), they may need to make a bigger move.

While the rate isn’t determined by the housing market, it does play a big role in how the property market moves. And since we’re here to talk about property, let’s look at how lower rates can impact the market.

Using the CBA repayments calculator

If you were to borrow $800k at the current rate of 6.1% on an interest-only loan (meaning you're only paying interest, not the actual loan amount), your repayments would be $4,066 per month.

If rates drop by 1%, repayments on the same $800k would be $3,399 per month a reduction of $667, or $8,004 per year. That’s after-tax money, which could equal two months' wages for the average income earner.

So what does this mean?

In my experience, the more money people have access to, the more they spend. Even though the above example is referencing a saving, it also increases borrowing power—allowing people to borrow more money.

Increased Borrowing Power

As a result, this increase in borrowing power will lead to property prices rising. I know that’s not what you want to hear, but that’s just how it works. How much will they rise? It depends on the area and price point, but anything under $1M will generally increase in line with the boost in borrowing capacity or even slightly more.

Here’s what it looks like on the CBA borrowing calculator for a couple with a combined income of $180k no kids. 

Interest rate @ 6.1% borrowing power would be approx. $917,800
Interest rate @ 5.1% borrowing power would be approx. $1,005,800

That’s a jump of $88,000!!! 

Closing Out

If you’re thinking about buying your first home, please, please, please start getting the wheels in motion ASAP. You can read a previous article on where to start HERE. We’ll also be launching the community soon, so keep an eye out for updates.

The whole reason I started First Home Club was to help first home buyers understand the market, provide industry insights, and make the whole process less scary. You’ll be able to buy a property sooner, buy a better property, save money, and make that dream come true.

If you found this valuable or know someone who would benefit from reading it, I’d greatly appreciate you sharing it. I want to change the way Australia buys property, and I need your help to spread the word.

See you next week,

James Rankin
Club Captain
First Home Club