THREE WA property experts expect the official cash rate to remain unchanged at 1.5 per cent at the Reserve Bank of Australia’s (RBA) first meeting for 2018 next week.
Realmark managing director John Percudani said with the current cold front hitting the eastern states and little prospect of inflation and wage growth in the short term, an imminent increase in housing finance interest rates was unlikely.
“We do however need to be aware that the cost of funding is on the rise, especially for fixed and longer-term finance,” he said.
“Regardless of whether or not an increase will be produced, this will be from a base cost of finance that is at an attractive and historically low level.”
Peard Real Estate chief executive Peter Peard said the RBA was under no pressure to move the cash rate.
“Inflation remains within the target range of the RBA and while there has been strong employment growth over the past year, wages growth has been virtually stagnant,” he said.
“Also, the big banks have increased interest rates out of cycle for investors, which has successfully cooled off the booming Sydney and Melbourne property markets.”
Harcourts WA chief executive Paul Blakely also expected the official cash rate to remain unchanged although he said a rise might be possible in the last three to six month of 2018, depending on the progress of the eastern states’ market.
“The larger states have had a good couple of years in relation to value increases and if this continues the RBA will want to bring the heat out of the market which may mean a slight increase,” he said.
Mr Percdani also believed there was the potential for rate rises in late 2018 or early 2019.
“This will of course depend solely on economic conditions, which are looking increasingly favourable at a time when there is high liquidity in the global market,” he said.
“Looking closer to home, we must also take into account the drive for tax cuts which could potentially influence the RBA to consider interest rate changes.”
Mr Peard expected rates to remain stable.
“In this environment the RBA wants to continue to encourage consumer spending through a low interest rates regime,” he said.
Confidence in the Perth property market was improving and any interest rates rises were not expected to have a significant effect.
“Confidence in residential property is as high as it’s been in some time,” Mr Blakeley said.
“We have seen improvement during the last six months of 2017 and we expect that to continue into 2018.
“Also, banks are confident enough to aggressively target the residential property market; one of the Big Four has just introduced a variable rate of 3.5 per cent, which is the lowest we’ve seen in nearly 60 years.”
Mr Percudani said although changes to interest rates had a direct and immediate effect on the property market, there were other factors to consider, including employment security and population growth, which go hand in hand to drive demand.
“Collectively these factors are looking positive for the WA market,” he said.
“It should also be noted that any adjustments in interest rates are likely to be marginal and this, combined with the affordability of the local market, suggests a promising position.”
Mr Peard said Perth was one of the most affordable capital cities in Australia for homebuyers and the stable interest climate helped reinforce consumer confidence.
“Peard Real Estate Group has seen this growing confidence translate into greater activity especially by first home buyers who can now secure home loans to buy established homes for around 3.5 per cent,” he said.
Preparing for interest rate rises
While the RBA is not expected to lift rates significantly this year, banks can still act independently and raise the rates on their own products.
Resolve Finance managing director Don Crellin said there were a number of ways homeowners could prepare themselves for interest rate rises and ensure they were protected from repayment stress.
“My advice would be to focus on creating some extra breathing space while interest rates are historical low levels,” he said.
“This will pay dividends in the future where interest rates may be higher or, your circumstances change more broadly.”
Take your monthly repayment and pay half of that sum every fortnight.
There are 12 months in the year but 26 fortnights, so if you currently pay $2000 a month you would make payments of $24,000 a year, but if you switch to paying $1000 fortnightly you end up making payments of $26,000 in the same period.
Not only does this create a repayment buffer for you at a later stage but also ends up saving a significant amount of interest while reducing your loan term.
On a standard home loan of $350,000 these interest savings can be in excess of $50,000 with a corresponding loan term reduction of nearly five years.
Round up your loan and pay a little more
Any amount you pay in excess of your minimum repayment can make a significant difference to your home loan over time.
For example, based on a loan of $350,000 over a 30-year team with an interest rate of 4.25 per cent, a monthly repayment would be approximately $1722.
Rounding this up to $2000 per month would see an interest saving of approximately $73,000 and a reduction in the loan term of over seven years
Get a home loan health check
Home loans should never be a “set and forget” proposition and it is recommended you review your current deal every two years or so.
With new products constantly entering the market, there may one with a better rate and fit for you.
To fix or not to fix?
The most important feature of a fixed rate loan is not necessarily the interest rate itself, but knowing what you have to pay each month for an extended period of time.
Lenders will generally offer a one, two, three or five-year fixed rate loan so you will need to consider how long you want to be tied into the same deal.
If you are thinking of moving or renovating in the near future, a fixed rate may not be ideal because if you refinance before the end of a fixed rate period, you could get stung with an expensive break cost.
Many customers are now opting for the best of both worlds and split their home loan, with some on a variable rate and some on a fixed.
This solution can deliver the flexibility of a variable rate home while providing a level of repayment certainty.
As always, seek the advice of a professional and qualified mortgage broker.