THE PAST year has delivered ups and downs for the property market but 2019 has finished strongly and the future's looking good for investors. The Federal Election was largely to blame for putting a brake on activity in the first half of 2019, along with the Banking Royal Commission, which delivered its recommendations in February, and tightening lending restrictions directed by the Australian Prudential Regulation Authority (APRA). But now confidence and prices are rising, lending restrictions have eased and the cost of borrowing is cheap due to low interest rates – and is expected to remain that way for a long time to come. It’s this lending landscape that will be one of the biggest positives for investors in 2020. Record low rates are here to stay
At its most recent monthly meeting in December, the RBA kept the cash rate on hold at a historical low of 0.75%. Interest rates have now been falling for eight years, with the cash rate reducing from 4.75% in October 2011 to its current level, including three cuts totalling 0.75% in 2019. The last fall in the cash rate was a 25-basis point drop in October.
Most economists are forecasting a further fall of 0.25% to 0.5% in the cash rate in 2020, with the first cut as early as February, when the RBA first meet again for the new year.
‘Quantitative easing’, as it’s referred to, is expected to deliver at least two cuts in 2020. That would mean that the already historically low 0.75% cash rate rate would be slashed to 0.25%, and while lenders don’t always follow suit with the RBA, it would likely see the retail residential lending rate to borrowers come down to around 2.75% to 2.85% (currently variable rates are sitting at around 3%).
While there has been some speculation the cash rate could fall to 0% or below in the future, RBA Governor Philip Lowe has indicated this is very unlikely. What’s more likely is that the low very interest rate environment will persist for an extended period of time.The expectation by experts is that interest rates will remain low until at least 2023, but some are convinced low interest rates are the ‘new norm’ and will be around for a decade.
What does this mean for investors? Knowing that low interest rates are here to stay gives investors and homeowners greater confidence to make plans.For some, cheap credit means the perfect opportunity to purchase an investment property and leverage off other people’s money, taking advantage of the capital growth on offer c/- rising property values.
Others, such as older Australians, may use low interest rates as an invitation to redirect funds and clear debt quicker.
Not only is borrowing more affordable at the moment, but finance is also easier to access. APRA has reviewed its guidance on serviceability assessments to lower borrowing restrictions, with the result that banks are more able and willing to lend so finance is more freely available. Lenders are, however, still cautious with whom they will lend to and how much. Even though we don’t need to worry about interest rates going up in the foreseeable future, investors should also be careful with borrowing and avoid taking on debt they can’t afford. A strategic approach to investing is wise.
Are you getting the best rate? Lenders are competitive and are offering some very attractive interest rates now. Many are only offered to new customers, but existing customers should also be seeking to get the best deal.
Every borrower should conduct a regular financial health check at least once a year, which includes ensuring you are getting the best possible interest rate. If you haven’t had your home loan/s reviewed in the past 12 months we can bet, you probably aren’t on the best deal available.
At the moment, we believe your interest rate should be under 3.3% on your home loan and below 3.5% for investment property loans. If your rate is higher than that you should first ask your lender for a better rate and, if they’re not willing to budge, shop around for a better deal - which can do for you.
We would first establish the cost of any refinance (incl. fees for exiting your existing loan(s) and establishing new ones). Only if you will be better off financially, after costs, will we recommend you moving your loans. As always, it all comes down to strategy and what is best for you.
Click here to book a complimentary finance session with MRD in the New Year to assess your current loans and whether you can get a better deal elsewhere to put you ahead in 2020. If you have had trouble getting a loan in the past, our specialist finance strategist may be able to help you.