The RBA’s most recent interest rate reduction is welcome, of course. But I’ve read some of the commentary surrounding it with interest. I guess the experts were mostly expecting the RBA to do nothing this time so the 0.25% cut was a bit of a pleasant surprise.
For me, I see it only as a small dollop of extra tomato sauce on my meat pie. (I’d prefer to have even more to make my pie even more tasty but at least I have a bit more and I’m glad for that.)
But the actual effect on the average mortgage of $300k is quite small. It’s about $750 per year or roughly a small latte (or a pie) each working day. In monetary terms it’s not a lot to get excited about then.
For a home owner that difference might be important. It’s not surprising that the number of ads calling for people to refinance to lower rates is on the rise. Owner Occupiers make up a much larger slice of the home loan market pie than investors and are generally more interest rate sensitive.
For an investor then, there are far more important issues to consider: such as, is now the time to buy? Or even, what effect are the rate reductions having on the overall market?
This interest rate reduction in isolation will not do a lot for investors. What you should be considering are the cumulative effects that multiple reductions have had so far. This is the most recent (and possibly not the last) in a number of reductions that should stimulate the market into action. The longer that rates are kept at these levels the more comfortable people will be with the price of things. And that improves affordability.
More people can afford to buy
Having more people who can afford to buy, means more demand and that means higher prices in the long term.
So the question to ask yourself is, am I moving closer to being able to purchase now or is the market moving away from me?
Owner occupiers tend to look at the property price to make a decision whether to buy. Investors however look at the cost of holding an investment property as one of the key deciders. Currently we are getting very close to that being at its lowest point for many years.
Experienced investors understand that the cost of holding a property is reduced by lower rates. While this sounds obvious, some investors can get caught up in the quest for lower rates and make decisions which compromise their future borrowing ability.
Lower rates are making many properties closer to cash flow positive than ever before. The input needed from your income to supplement the rental income is reducing with every interest rate cut. Fixed rates can offer the ability to minimise your contribution to the property for a Fixed Term.
When you consider that rentals are close to 5%, variable rates are under 6% for most Professional Packages and some 3 year Fixed rates are around 5.5% and you can see what I mean. Naturally, when you consider the possible taxation benefits as well, you will realise the opportunities that this current environment presents. You should ask yourself, do you see any advantage in this for you?
The importance of a buffer
I’ve said before that having a buffer is important. Now it’s even more so. Have you topped up your loans yet? Have you decided if the current low Fixed rates are relevant for you? It can make sense to fix some of the debt once you have topped up and you are ready to purchase again. This is a bit like making the foundations solid first, so you can continue building.
Obviously as investors ourselves, we like to see the RBA reducing the cash rate so we can reap the benefits, but the bottom line is that the state of the market as a whole is even more important.
So even though I started this discussion with a lament about the lack of sauce, in reality, it turns out that the pie is more important anyway. And the way things are looking, we could all be enjoying quite larger pies in the not too distant future.