RBA Rate Cut: Is Now the Time to Buy a House?
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RBA Rate Cut: Is Now the Time to Buy a House?

Suzi O'Shea

Suzi O'Shea

26/03/2021 • 7 minute read

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For the first time in history, it’s cheaper to own than to rent.

On the 3rd of November, the Reserve Bank of Australia made history when it cut rates to the lowest they have ever been, announcing a rate of 0.10%. This news made waves all over the country, sparking questions about mortgages, loans and reigniting the debate of owning versus renting. But does this mean it’s actually cheaper to buy your own home?

We take a look at what these historic rates mean and how they impact you.

Buy vs. Rent: What’s cheaper?

Let’s start by tackling the biggest question first. Is it cheaper to buy your own home?

Depending on your circumstances and where you are looking to buy, the simple answer is – yes. We draw this conclusion from a number of different factors. Obviously, the incredibly low-interest rates are very appealing and play a large role in the affordability of buying a home. The less interest you pay on a loan, the smaller your overall mortgage is. Low-interest rates can also save you thousands of dollars over the term of your loan.

Another factor that plays into this is the number of government initiatives available to help make your dream of being a homeowner a reality. In the recent budget announcement, the First Home Loan Deposit Scheme was extended to help more Australians get their first home sooner.

This is just one of the several schemes currently available to help homeownership for everyday Australians. As a result of the financial devastation caused by the pandemic, the Australian Government may possibly extend or create new initiatives to help boost the economy. Check with your state government legislature for more information.

Home owners be warned.

Arguably the most contentious issue that always arises from RBA announcements is whether or not banks pass on the rate cuts. As James Eyers from the Australian Financial Review points out, with interest rates already so low, it becomes difficult for banks to maintain profits if they drop their rates any further.

“Because interest rates on many deposits are already at or near zero, banks can’t offset reductions in rates charged on loans with cuts to the rates offered to savers. This is squeezing net interest margins, the key driver of bank revenue, and this will be more pronounced after this latest cut.”

This may be a hard pill to swallow, given the enormous revenue that the big four make. The good news is, not all banks and lenders operate in the same way. We asked Josh Wessels, Principle of Diversifi Brisbane, for his best advice for homeowners,

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“This depends on who you bank with as to whether or not they will pass on the cut. While the RBA sets the rate, it is not a mandatory requirement for lenders to pass it on. The hope would be that your current bank or lender honours the rate; if not talk to a broker!”

For current homeowners, your best course of action would be to have a chat with your lender to see if the rates have changed. If not, shop around for a better deal or look into getting a broker who can do all the hard work for you.

Josh says, “Brokers have access to thousands of products and know what lender will suit you best, remember it’s not always about your rate, but the best product for your needs.”

Savings accounts set to take a hit

The lower the interest rate, the slower your savings account grows. This is potentially the only downside for consumers. With the slashed interest rates, any savings you have will accrue a sluggish growth rate. This shouldn’t be discouraging. If 2020 has taught us anything, it’s to expect the unexpected. Unemployment and underemployment rates are unsurprisingly high, which has led to a collective uncertainty around employment retention. Such uncertainty would encourage saving for a rainy day, especially if there is a perpetual cloud hanging over our heads. So, now may not be the time to dip into your savings and buy a property.

Should you buy?

So with all that said, is now the right time to buy? There are so many variables at play that it’s difficult to answer this question with any certainty. The first thing you should do is gauge what your repayments might look like. This handy calculator allows you to punch in your current monthly rental payments and gives you an estimate of what your mortgage payments might be. Of course, it won’t be exact, but it’s a good starting point to let you know the ballpark of what figures to expect.

Then you need to decide if buying a house is the right option for you. Danielle Brophy, Financial Coach and certified financial planner, told us “World and economic uncertainties will always ebb and flow. You need to have a long term plan that accepts that all market returns will go up and down.” When working out what you want to achieve, Brophy says you need to ask questions like:

  • Did you want to buy a house anyway?
  • Are you wanting to buy an investment property as part of a bigger investment portfolio?
  • Are you going to diversify your investments?

There was a long-held belief that as part of a natural progression into adulthood, you get a job, settle down, and buy a house. Property was always believed to be your biggest and most sound investment. In recent years, this idea has been contested. Many experts have argued the case both for and against investing in property, and again, the variables are endless.

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For example, you may be financially better off renting if you rent in an affordable area and invest in shares or a business. On the flip side, investing in property carries a much lower risk.

If you have already made a decision to buy a property, now is the time to strike while the iron is hot. If buying a property is something you have given a lot of thought, seek the advice of a financial advisor or mortgage broker to gather as much information as you can to make an informed decision. From a cash rate interest point of view, the odds are definitely in your favour and will be for some time. Josh Wessels says, “I personally don’t think the cash rate will have a dramatic increase in the future. It would only serve to cause more financial stress in the current national environment, which is at an all-time high. This is what the government is trying to avoid.”

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Oiyo is a consolidated online resource; we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation, or other advice to check how the information and ideas presented in this article relate to your unique circumstances.

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Suzi O'Shea

Written by Suzi O'Shea

Suzi O'Shea is a contributing writer for Oiyo. She has a Bachelor of Arts, Communications with honours from Southern Cross University. Suzi has worked in media for over 15 years and has been published in several online publications as well as print magazines. She has worked as a freelance writer, speaker, and change management facilitator.

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