What Long-Term Low Interest Rates Really Mean For Property Owners
Interest rates are currently at record lows and it looks likely they’ll stay there for some time.
So what does that mean for Sydney property owners and buyers?
It makes it easier to meet mortgage repayments
Low-interest rates influence how much we need to dedicate to our mortgage repayments. With the official cash rate now set at just 0.25%, each of the big four banks currently offers a two-year fixed rate home loan at just 2.29%.
Even before COVID-struck interest rates were close to historic lows. To show just how cheap money is right now compared to normal times, you only have to compare this to the average variable interest rate a decade ago when it was closer 7.5% – close to Australia’s average variable rate.
If you were to borrow $1 million right now on a 30 year home loan with a 2.29% interest rate, your mortgage repayments would be $3,843 a month. If you were to borrow the same amount when interest rates were 7.5% your monthly repayments would be $6,992 a month. That’s saving of around 45%.
Low-interest rates mean people can often borrow more
Given that it’s a lot easier to meet repayments when interest rates are low, many people tend to borrow more.
For instance, if your budget allowed you to comfortably meet mortgage repayments of $5,000 a month, you’d currently be able to afford a mortgage of around $1.3 million on a 30-year loan term. A decade ago, when interest rates were at 7.5%, you would only have been able to afford to borrow $715,000.
This keeps property prices high
Because people find it easier to borrow money and can borrow more, this tends to bolster property prices. An RBA paper found that there was a direct correlation between interest rates and house prices.
This makes sense. When people have more money at their disposal – as they do when interest rates are low – it’s only natural that they’re willing to offer more for something they want to buy.
It can make it more attractive to buy than rent
As interest rates get cut, we’re reaching the point where it’s cheaper to buy than rent in many suburbs. When this happens, it tends to have two effects.
It encourages first homebuyers to enter the market. This is especially true right now, with generous government incentives for first homeowners, including a first homeowner grant, stamp duty concessions and the federal home loan deposit scheme.
At the same time, low-interest rates can keep rents and yields down. With more people entering the property market there are fewer people renting and less competition for properties.
It can drive investors into property
That said, investors are still often attracted to property in a low-interest-rate environment.
That’s because low-interest rates may benefit borrowers but they’re bad news for savers. When the official cash rate is low banks don’t just cut the rate on their home loans; they also cut them on their savings accounts and term deposits.
Investors relying on yield need to look elsewhere and one of the assets they naturally turn to is property. Again, this can help push prices higher, even as it drives yields lower.
Some people have built a lot of equity
The good news is that, for people who’ve already bought, low-interest rates mean they can more easily build equity. That’s partly because, as prices rise, your home loan makes up a smaller percentage of the total value of your home. It’s also because it makes it easier to pay in extra money to get ahead on your mortgage.
At the start of the COVID-19 pandemic, the RBA revealed that half of Australians had enough money to cover at least three months’ mortgage repayments in their offset account or redraw facility. If people become more cautious during COVID-19 these buffers may grow.
They put a cushion under prices in a recession
Against this, however, is the fact that as businesses struggle during the COVID-19 pandemic more people will lose their jobs and meet their mortgage repayments. RBA research shows that for every percentage point unemployment lifts, mortgage delinquencies rise 0.8%. This is sobering when you consider that the Commonwealth government expects unemployment to hit 9.5% in December – up from 5.1% in February 2020.
That said, as low-interest rates make it easier to pay the mortgage, they also mean fewer people need to sell. This can also help make sure that property prices don’t fall as far as they otherwise would.
Low-interest rates are good news for homeowners and for property prices more generally. And, for those with steady employment, they can actually make a recession like the current one a good time to enter the market or to upgrade.
If you’d like to know more about buying or selling in Sydney’s eastern suburbs, get in touch with our team today.