With the Australian Bureau of Statistics reporting a slowdown in inflation since September, prices are increasing more slowly. As a homebuyer, this is important because it has a significant impact on interest rates and ultimately, your borrowing capacity.
Inflation’s ties to interest rates
Inflation reflects the overall increase in the price of goods and services. The Reserve Bank of Australia (RBA) aims to maintain inflation at a stable level, in a target range of between 2 to 3%.
When inflation rises too high, it decreases the value of your money. To address this, the RBA raises the official cash rate, which influences all other interest rates in the economy, including those offered by mortgage lenders.
Higher interest rates make borrowing more expensive. They may discourage people from taking out home loans which therefore cools down the economy and ultimately, inflation.
On the other hand, when inflation starts to fall, as is currently happening, the RBA may consider lowering the official cash rate. This makes borrowing more affordable, which could potentially lead to a surge in loan applications.
This played out over the last few years in Australia. Following an increase in inflation throughout 2021 and into 2022, the RBA began a series of increases in May 2022 bringing the current cash rate target to 4.35%.
Since then, inflation has begun to ease and there is growing expectation from the big four banks that the RBA will begin to cut interest rates later this year and into 2025:
- Commonwealth Bank predicts three cuts, beginning in September
- Westpac predicts two cuts starting in September
- NAB forecasts a single cut in November
- ANZ expects just one cut sometime in the last quarter
Types of loans
Therefore, paying attention to the country’s interest rates is very important for property buyers. But, there is a further aspect to keep in mind: the type of mortgage you take out.
Fixed-rate home loans are not as affected by interest rate changes as the loan’s rate remains fixed to the number provided at the time of signing.
Mortgage holders with variable-rate loans will see much more of a difference with changing interest rates as your lender will adjust the interest rate according to the RBA’s cash rate decisions.
Borrowing power
Interest rates directly impact your borrowing capacity. This is the maximum amount you can borrow for a home loan.
When interest rates fall, the monthly repayments on a loan become lower. This allows you to borrow a larger sum without exceeding affordability thresholds. In short, your borrowing power increases.
When interest rates increase, this leads to a higher monthly repayment. How much you are able to afford to borrow may change and you may need to readjust your budget.
Buying in Perth
Despite prices in Perth increasing 12.7% for houses and 5.0% for units over the last year, the Real Estate Institute of Western Australia (REIWA) reports that properties in Perth are still more affordable than in other capital cities.
For example, CoreLogic’s March housing value index showed that the median home value in Perth was $703,502. This is lower than:
- Sydney at $1,139,375
- Canberra at $838,976
- Brisbane at $817,564
- Melbourne at $778,892
- Adelaide at $734,173
This means the Perth market is already more favourable for buyers.
Lower interest rates could help even further. With lower monthly payments, you will be able to increase your budget and buy a more expensive home. Or, depending on your loan terms, you can increase how much you pay each month and pay off the loan quicker. This may allow you to buy another property as an investment.
But, lower interest rates can also lead to more buyers entering the market. As low supply in Perth is currently a challenge, this could lead to more competition for properties which in turn could put upward pressure on prices.
Interested in buying a property in Perth? As an expert Perth buyer’s agent, Resolve Property Solutions can help. To discuss your options, book a free strategy call with Peter Gavalas.
