Home Loan Rates Are Changing!

Interest rates are changing in 2024 or 2025, and it's happening within the next 12 months. This shift presents a generational opportunity for some, while for others, it could be the worst possible outcome.

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Now, we've had talks about the Reserve Bank of Australia (RBA) coming out and cutting interest rates, but they’re not going to cut because inflation is high. As a result, banks have started to change their home loan rates as well as their term deposit rates.

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When interest rates are cut, two things are primarily affected:

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Home Loans and Term Deposits

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This is what you and I are probably most concerned with, but there are also a lot of people who park significant amounts of cash in the bank for term deposits.

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With term deposit rates at around 4%, people are thinking: "Hey, 4% risk-free? No problem. Sign me up." Especially when, just a couple of years ago, mortgage rates were so low that term deposit rates were around 1% or even lower. Now that you’re getting a 3X or 4X return compared to a few years ago, a lot of people—most likely pensioners with substantial savings—are saying: "This is great. I don’t know why people are complaining. Life’s good."

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However, we could soon see the shift back in the other direction.

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As much as you and I don’t know what the RBA’s next move will be, banks are starting to predict where they think rates will head. The hints they’re dropping are based on the products on which they actually adjust rates.

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Now, take a look at this:
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Banks have been wrong on many occasions, so don’t just assume: "Oh well, inflation isn’t going to come down anytime soon, so rates aren’t going to be cut, and that’s how I’m going to prepare."

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You always need to prepare for both scenarios.

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If you’re in the camp of saying, "Interest rates are getting cut this year," and you put all your eggs into that basket and the cuts don’t happen, you might be in trouble. You might have to sell your property. That’s why you’ve got to prepare for both scenarios.

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Rate Cuts

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Macquarie has cut its rates by up to 25 basis points.
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We’ve also seen the same at the Bank of Sydney, which cut rates by up to 45 basis points.
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Just to give you an idea of how confused everyone is—including economists and a lot of these bank analysts—you’ve got the Bank of Queensland cutting their investment rates by up to 25 basis points. 
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So, as you can see, there’s no consistency in how much is being cut or when. This inconsistency is further highlighted when you start looking at mortgage rates at these banks.

You’ve got banks like Regional Australia Bank putting up their rates on mortgages by up to 40 basis points.

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You’ve got the same thing happening at G&C Mutual Bank.
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But then, you’ve got Newcastle Permanent dropping fixed rates by 10 basis points.
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You’ve got Firstmac and Loans lifting rates.

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You’ve got RAMS going out of business.
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Now, Australia’s fifth bank is starting to reduce their rates.
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At this point, we know that the Federal Reserve Board (FED) in the United States is almost certain to cut rates in the next couple of weeks. As a result, we’ve seen mortgage rates in the United States fall to their lowest level in more than a year.
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This is really interesting, and I’m going to break it down as to why this makes a lot of sense around what happens with prices next.

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Believe it or not:
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Let’s take an example:

You’ve got a property that’s been on a fixed rate for a couple of years. You might decide, Well, I want to sell this property, but I can’t because I’d have to buy something else. If I let go of my fixed rate, which is really low, I’m going to have to now purchase a property, which requires me to be on a 6% interest rate.

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This could be 2 to 3 times higher than what my current rate is, so people just stay put—they don’t do anything. That’s why we have transaction volumes going down.

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On the flip side, let’s say you do own property and decide, Okay, I want to purchase more.

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Well, you can’t because interest rates are high. However, if you decide to sell and then purchase again, you actually wouldn’t be able to pass the bank’s servicing rates based on today’s interest rates. As a result, you would be going backward in that case.

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Let’s say you decide it’s important to trade some of your assets.

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If your borrowing was based on rates of, say, 4%, and all of your borrowing capacity was calculated at 4%, but if they did the same capacity calculation today, you wouldn’t be able to buy back everything you currently own. That’s the big issue we have right now.

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As interest rates remain elevated, it means people can’t shift, and that’s why we also have rental pressure.

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Why? Because you might have properties where—take, for example, a family of six living in one house—and suddenly, two of the kids decide to move out over the last couple of years. Now, they don’t need a house as big as they did before. As a result, they can’t transact and downsize or move, which would then free up some stock.

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I hope you guys have learned a lot from this article.

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I’ll catch you guys in the next one.

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Thanks, guys.

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