Borrowing Power vs. Property Prices: The Impact of Rate Cuts

The 0.25% RBA rate cut in February has sparked excitement – how will it and the predicted three to four future rates cuts impact your borrowing power and what property opportunities could this unlock for you? 

Now is the time to explore what’s within reach, before further rate decreases and first-home buyer incentives impact the property market.

In today’s blog we cover:

  • How Interest Rate Cuts Boost Your Borrowing Power
  • How Increased Borrowing Power Opens the Door to More Property Opportunities
  • The Catch: Increased Competition and Rising Prices
  • Why it Pays to Take Action Sooner
  • What Happens When Borrowing Power Shrinks?

 

How Interest Rate Cuts Boost Your Borrowing Power

When the RBA cuts the cash rate, it typically leads to lower interest rates from lenders and that has a direct, positive impact on your borrowing capacity.  

Put simply, when rates drop, you can borrow more. 

Take February’s 0.25% rate cut as an example: 

  • Prior to the cut, a typical owner-occupied rate was around 6.15%. Add the 3% assessment buffer, and lenders were assessing borrowers as if they were repaying a loan at 9.15%. 
  • After the 0.25% cut by the RBA, that same loan might now be assessed at a rate of 5.90%, with the buffer bringing it to 8.90%. 
  • With the expected 0.25% reduction from the next RBA meeting on May 20th this will fall to 5.65% and 8.65%. 

This reduction in the assessment rate means that borrowers can now afford to take on a larger loan, directly boosting their borrowing power.  

And if the market’s predictions of multiple rate cuts play out, it could significantly increase what buyers can afford, with expectations that the average standard variable rate may drop to around 5%. 

 

How Increased Borrowing Power Opens the Door to More Property Opportunities

Rate cuts can open the door to a wider range of property options, but they also tend to push up property prices.  

For example, a single person earning $150,000 could see an increase in borrowing capacity by around $20,000 off the back of the first rate cut. 

If the RBA continues to cut rates by another 1%, this same borrower could have access to up to $75,000 more, enabling them to purchase homes nearly $100,000 more expensive assuming an 80% loan to value ratio.

How rate cut impacted borrowing power - single

For couples earning $300,000 combined, the increase is even more significant.  

A 0.25% rate cut gives them an extra $35,000 in borrowing power, and a 1% reduction could provide up to $150,000 more. Nearly $190,000 in added purchasing power. 

How rate cut impacted borrowing power - couples

 

The Catch: Increased Competition and Rising Prices

A rate decrease means more borrowing capacity for everyone, not just you.  

As more buyers are able to afford higher-priced properties, competition in the market will intensify. 

As more buyers gain the ability to bid on higher-value homes, property prices are likely to rise, particularly in competitive markets or areas where prices have been flat or declining for some time. Think Melbourne and Darwin. 

This increased demand often pushes prices up faster than anticipated.  

This means today’s opportunity to buy a property within your price range could quickly become tomorrow’s new price baseline. 

So, while a rate cut might open the door to a greater level of affordability, it can also lead to a lift in prices, potentially making those homes just as difficult to purchase as before.

 

Why it Pays to Take Action Sooner

So, should you wait for more cuts before jumping into the market?  

Not necessarily.

If the market is already showing signs of growth, waiting could mean paying more later or being priced out altogether. 

The smarter move is to get your ducks in a row, such as get a pre-approval, viewing properties and attending auctions on the weekend and be ready to act.  

If more cuts come through before you purchase, you can always increase your pre-approval with your strategic mortgage broker.  

That way, you’re in a position to move quickly when the right property comes along. 

The journey of:

  • Selecting a lender,  
  • Getting your paperwork together,  
  • Obtaining pre-approval,  
  • Deciding what type of property, location and price suits you, and  
  • Tracking comparable sales so you are ready to purchase  

is often 2-3 months for those who start moving from today.

The problem often arises when we only take the above steps once we feel mentally ready to purchase. 

That’s when the pressure kicks in. There’s a lot to organise, and the time and effort needed to get finance and strategy in place can lead to frustration as we try to position ourselves to confidently negotiate or bid at auction.

 

What Happens When Borrowing Power Shrinks?

It’s also worth noting that when interest rates rise, borrowing power shrinks, as lenders assess your ability to repay at a higher threshold, limiting how much you can afford to borrow.  

However, as history has shown, and as we explored in our episode on how interest rate rises have impacted the Australian property market prices over the decades, rate hikes don’t necessarily lead to declines in price growth.

#158: How interest rate cycles have impacted the property market since 1990 when the RBA first started targeting the cash rate and some predictions on what will happen this time

For example, the recent price growth in Perth, Adelaide, and Brisbane, even during the RBA’s fastest rate-hiking cycle on record, shows that property values can still rise, even in a rising interest rate environment. 

These cities have seen strong price growth despite the rate increases, proving that other factors can outweigh the impact of rate hikes on reducing property values. 

There is a much greater correlation between rate reductions and price increases.  

 

Reach Out to Us for Expert Advice  

Schedule a meeting with us to discuss your: 

  • Mortgage Strategy 
  • Next Purchase 
  • Refinance  
  • Develop a Comprehensive Property Plan 

 

Want to Learn More About Borrowing Capacity?

Listen to #306: How to Increase Borrowing Power – How Kids, Rate Cuts and Variable Income Impact Property Buying Potential, Equity Access & Refinance

 

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