The Reserve Bank of Australia’s (RBA) recent decision to cut the official cash rate has sparked discussions about its impact on the property market. Whether you’re a homeowner, a first-time buyer, or considering refinancing, understanding how this rate change affects mortgage repayments and housing affordability is crucial.

Increased buyer competition and prices

According to PRD Chief Economist Dr Diaswati Mardiasmo, “Historically speaking, when there is a cash rate cut, then there is a frenzy of buyers entering the market. A lot of people have been waiting for the past 12, maybe even 18 months for a cash rate cut. So that means that there will be a lot more competition in the market, a lot more buyers, a lot more people looking for auctions, and normally what will happen is that prices will start to increase.”

For sellers, this heightened demand can work in their favour. Dr. Mardiasmo explains, “Originally, historically, whenever we have had a cash rate cut, there is an increased amount of people in the market, and because of that, there’s going to be more buyers and more competition for people’s property.”

Borrowing power and housing affordability

A lower interest rate environment can increase borrowing power, making it easier for buyers to enter the market. Dr. Mardiasmo notes, “For home buyers looking to enter the market, a cash rate cut means that there’s a possibility, depending on your financial situation, that you can access more money to borrow. That means that you might be able to go slightly above your original purchase price and access a different type of home that you might not have considered before.”

However, while lower rates can improve affordability, buyers should be mindful of rising competition and potential price increases. Careful financial planning is essential to ensure long-term stability.

Lower mortgage repayments and refinancing

For homeowners with variable-rate home loan, the rate cut is likely to bring some relief, as lenders may pass on lower interest rates (as most have already!). This means reduced monthly repayments, easing financial pressure and improving household cash flow.

For those on fixed-rate loans, the impact won’t be immediate. If you’re nearing the end of a fixed term, now could be a good time to explore refinancing options. With borrowing costs decreasing, many existing homeowners may find an opportunity to secure a lower rate, reduce their loan term, or decrease their monthly repayments.

Future interest rate movements

This is the first rate cut Australia has seen since the RBA began increasing the cash rate in May 2022. Dr. Mardiasmo highlights the potential for further cuts, stating, “We have seen other countries like the USA, Canada, and New Zealand do more than one cash rate cut. So, it is possible for our own RBA to do more than one, maybe two or three.”

However, she cautions that future cuts will depend on inflation trends: “The RBA closely watches our inflation rate. If inflation remains at a healthy 2-3% range, more rate cuts are possible. However, if this cut results in a big spike in inflation, another cut is unlikely.”

Final thoughts

The RBA’s rate cut presents opportunities for both buyers and existing homeowners. While lower rates can be beneficial, it’s essential to weigh all factors, including potential price movements and long-term affordability. Keeping an eye on market trends and seeking expert advice will ensure informed decision-making in this changing landscape.