We see 3 ways that low interest rates will affect property owners moving forward
#1 Mortgage repayments are lower
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 $600,000 right now on a 30 year home loan with a 2.29% interest rate, your mortgage repayments would be $2,306 a month. If you were to borrow the same amount when interest rates were 7.5% your monthly repayments would be $4,195 a month. That’s saving of around 45%.
#2 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 $4,000 a month, you’d currently be able to afford a mortgage of over $1 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 $570,000.
#3 Property prices will remain 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.
House prices are on the rise. Find out the value of your property now.
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