How to use the new, historic-low interest rates to build wealth
Published 4:14 am 10 Nov 2020
With Australia’s official interest rate now at an astoundingly low 0.1 percent, it’s never cost less to borrow money. DGI Founder and CEO Dominique Grubisa explains what the latest rate cut means and how to use the current set of economic conditions to your advantage.
With all the fuss around the US elections in the first week of November, it was easy to miss important items of news closer to home.
On November 3, while most of us were transfixed by the looming battle between Donald Trump and Joe Biden, the Reserve Bank of Australia (RBA) made the momentous decision to further lower the country’s official cash rate. From what was already an historic low of 0.25 percent, the bank’s Board plunged us into completely uncharted territory, taking the cash rate to 0.1 percent – just a fraction above zero. It was an extraordinary, once-in-a-lifetime event, and one that will have repercussions for all Australians in coming years, not the least those interested in buying property.
The RBA’s job is to help create a stable Australian currency and economy, and Board Governor Philip Lowe explained the rate cut was aimed at helping to stimulate the economy out of the doldrums caused by the COVID-19 pandemic. The RBA reasons that if people are paying less to service their mortgages, they can spend more on goods and services, pushing much needed cash into the economy. At the same time as cutting rates, the Board also committed to buying $100 billion in government bonds over the next six months. So, it is hoping to lower the cost of government borrowing and the cost of finance for all of us.
What is significant is that the RBA promised it would not raise interest rates again until inflation (currently at 0.7 percent) is in the ‘target range’ of 2-3 percent. As Philip Lowe explained, “Given the outlook, the Board is not expecting to increase the cash rate for at least three years.” While there is potential for the Board to drop the rate even lower to zero, we likely won’t see it climb again until 2023 or 2024.
So, what does the move mean for ordinary Australians?
For one thing, it will hopefully lead to a resurging economy, with more jobs and money to spend for everyone. The RBA believes Australia is now technically out of recession, with the drag caused by Victoria’s lockdown less than expected, and businesses across the country now bouncing back.
For another thing, the RBA move will mean extremely cheap home loans for the foreseeable future. While lenders aren’t required by law to pass on the full cut, most quickly moved to lower the cost of their fixed home loans in the first week of November. The four-year fixed rate at most of the big banks is now below 2 percent, although lenders haven’t yet cut their variable rates. On the flipside, the amount of interest people receive for money in the bank has also been slashed. On a balance of $40,000, a CBA bonus savings account customer can now expect to earn just $140 in interest a year.
Many economists expect the low rates to borrow money – and the fact that savings accounts are paying so little – will push more buyers and investors into the property market, driving up prices. Property prices across the country remain about 1.5 percent down on their pre-pandemic levels, with Sydney down 2.3 percent and Melbourne down 5.6 percent. But the latest figures from CoreLogic show that even before the latest interest rate cut prices had begun to creep back up, with the market rising 0.4 percent in October.
CBA head of Australian Economics Gareth Aird was last week, one of several economists to say there was a raft of evidence that house prices were set to take off, including strong consumer confidence and price expectations from buyers.
For people interested in investing in property, the current circumstances represent a rare opportunity. Borrowed money is extremely affordable, prices are down, and there are indications the economy is heading up, taking the housing market with it. At the same time, the tail end of the recession means there are a large number of distressed properties set to come onto the market, providing an affordable entry point.
If you’re interested in learning more about acquiring and selling a distressed property, register to our free Webinar.
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