How Does Reducing Home Loan Rates Affect You?

It’s the news that many homeowners have been waiting for: The Reserve Bank of Australia (RBA) has made the landmark decision to cut the official cash rate by 25 basis points at its May 5 meeting, sending the already record-low level crashing through the floor to 2 per cent. After a nervous period of waiting following both the March and April meetings, this move should finally alleviate some of the speculation surrounding interest rates – but what does this mean for the everyday home loan holder?

Financial Benefits

In a May 5 statement, RBA Governor Glenn Stevens noted that cutting the cash rate could provide further support for household demand and employment, while putting the Australian economy back on the front foot. The impact of this cut will likely be widespread. President of the Real Estate Institute of Australia Neville Sanders said this trim will give households across the country a boost, particularly if financial institutions pass it on in full (Police Bank has passed on the full .25% for its variable home loans).

“Since the RBA began downward movements of the official interest rate in late 2011, the proportion of the median family income required to meet monthly loan repayments has decreased 3.3 percentage points from 34.8 per cent to 31.5 per cent,” said Mr Sanders on May 5.

In fact, he pointed out that homeowners could save around $70 a month on an average loan – something that is likely to attract a lot of interest from prospective buyers. Not only could this provide extra funds to pad out your savings account, but you could find it a lot easier to make monthly payments on your home loan.

More homes, slowing prices

The cut could also put wind in the sails of the construction industry. According to recent figures from the Australian Bureau of Statistics (ABS) and the Housing Industry Association (HIA), the volume of building approvals soared to a new record a March. There were 1.8 per cent more approvals recorded in trend terms than in February according to the ABS – and New South Wales alone saw a 4.4 per cent improvement over the month. With news of the rate cut, these numbers could keep on climbing.

HIA Economist Geordan Murray said the new home building sector is one of the best performing sectors in the economy. Combined with the rate cut, the industry looks set to continue its exceptional form.

“New home building has been amongst the strongest performing sectors in the economy and the low interest rate environment has certainly played a role in boosting industry activity,” Mr Murray noted in a May 5 statement.

Only time will tell whether the cut trickles down to home loan customers, but in any case, this is a positive step forward for affordability across the country, particularly in Sydney. Property prices have been climbing exponentially in the Harbour City, but an influx of new homes could alleviate some of the pressure and open the door to a whole new set of buyers.

If you’d like to get ahead of the curve and start your property journey, our team of home loan professionals at Police Bank can help you through the application process.