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How the Interest Rates May Affect Your Next Property Purchase

How the Interest Rates May Affect Your Next Property Purchase
November 27, 2020 Rebecca Lee

Whether you are in the market to purchase a new property as an investment or you are looking for your forever home, there is a lot to consider during the buying process. Of the various factors that will determine whether a home suits you, one of the most important is your budget which can be significantly affected by factors that influence market prices.

Whilst interest rates will impact your next property purchase in a number of ways, they can have a particularly notable impact on the amount you pay for your next home loan.

How Interest Rates Directly Affect Property Pricing

Interest rates have a significant impact on property purchases via the effect they have on mortgage repayments – this is because interest rate reductions can increase buyers’ borrowing power. Given that lenders use interest rates to calculate mortgage rates, any fall in interest rates will generally cause a fall in the cost of mortgage repayments should a lender pass on an interest rate cut.

A downward impact on mortgage repayments will have an impact on property pricing. This is because as repayments become relatively cheaper, potential buyers can be more likely to purchase a home and take out a home loan, whether they are entering the property market for the first time or trading up from their previous home. This increased demand can have an upward impact on housing prices.

Lower interest rates can therefore result in lower repayments, thereby potentially increasing housing demand and causing an increase in property pricing. The inverse of this can also be true, where higher interest rates can result in lower housing demand and lower pricing. This is an example of how interest rates are a key driver of property cycles, and demonstrate the importance of considering interest rates in determining where the market may be headed.

The right home loan interest rate will be crucial in determining your repayments – for an idea of current rates, learn about ANZ’s home loan rates here.

The Other Ways in Which Interest Rates Affect Property

Whilst it is true that higher housing demand will generally drive up property prices (and vice versa), the impact doesn’t end here.

Most importantly, it is necessary to consider why interest rates are moving. When economic activity is low, interest rates are often cut as a result – this is because the economy is in need of stimulus, and theoretically lower interest rates encourage borrowing and spending (with the aim of increasing economic growth resulting in higher wages and lower unemployment). The generally accepted implication of this is that lower interest rates will occur in times of diminishing housing prices (when market performance and demand is poor) and increases in the interest rate often occur when increases in housing prices are evident (when the market is competitive).

Interest Rates and Property in 2020

With the unprecedented decrease in interest rates to 0.1%, 2020 is proving to be an interesting year when it comes to borrowing and property pricing as a whole. The decision to cut interest rates to this level was caused by factors including Australia’s first recession in almost 30 years, as a result of the COVID-19 pandemic, associated lockdowns and travel restrictions significantly hindering economic growth.

With interest rates having never been so low in order to increase economic activity, home loan repayments have become correspondingly lower in some circumstances. However, some lenders will choose not to pass the full rate cut on, instead passing just some on and using the remainder for reasons including funding costs of borrowing, or to keep as profit. As a result, it is important to be aware of your home loan options and consider refinancing whenever necessary.

Another aspect of interest rate cuts to consider is the impact it has on savings – interest earned in savings accounts will often be lower, which is another factor that may influence your decision to either buy a home or keep the money in your bank account.

Evidently, there is a lot to consider when it comes to interest rates and your next property purchase. Knowing how prices are currently affected and understanding how they may change in the future is crucial in determining your next property purchase.

 

About the Author:

Rebecca Lee is the Content Manager at Extras, a freelance writer, and an avid reader of self help books with a focus on finance. A big believer in taking action, she wastes no time tackling obstacles that lie ahead. When it comes to her endeavours in business and entrepreneurship, she’d rather be stuck with oh well than what if.

 

Important information

This is general information only and the views of the author(s).  It is not financial advice or recommendations, and does not take into account your personal needs, objectives and financial circumstances.  Please carefully consider whether this information is appropriate for you.