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What is the RBA planning for low-interest rates?

By Melanie Hearse  |  13 Apr, 2021

The Reserve Bank of Australia has sounded a warning on booming house prices, signalling it will clamp down on risky lending if the market overheats.

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With Australia experiencing historically low interest rates on home loans, buying a home is topping many Aussies spend list, including first home buyers who are combining these cheaper mortgages with Government incentives to buy their first home.

While the last decade saw lenders become very conservative in their lending practices, this move has been somewhat relaxed to counteract the devasting financial impacts of coronavirus on the Australian economy. 

As you would expect, the rush to make the most of these cheaper mortgages has seen demand for properties outstrip supply, and Australia is now seeing a historical rise in house prices, increasing the minimum cost to both get into the property market for the first time or take a step up the ladder.

This has seen many a borrower stretched to their financial limits and borrowing at the top end of their limit.  

On Tuesday, Reserve Bank governor Philip Lowe warned the RBA would clamp down on risky lending if the booming market overheated, though they did not expect to lift the official cash rate until at least 2024.

“Housing markets have strengthened further, with prices rising in most markets. Housing credit growth to owner-occupiers has picked up, with strong demand from first-home buyers,” Mr Lowe said.

“Given the environment of rising housing prices and low-interest rates, the bank will be monitoring trends in housing borrowing carefully, and it is important that lending standards are maintained.”

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What does this mean for low interest rates?

The RBA have rates are set to stay until they see inflation, which hinges on wages growth, which is yet to happen.  

“Wage and price pressures are subdued and are expected to remain so for some years. The economy is operating with considerable spare capacityit will take some time to reduce this spare capacity and for the labour market to be tight enough to generate wage increases,” Mr Lowe said.

He said underlying inflation is expected to remain below 2% over the next few years.

In short, while some lenders may increase their home loan interest rates, the highly competitive market to attract borrowers will more likely keep rates low for the foreseeable future.

Even prudent spenders could benefit from these record low rates, without borrowing more money. Many finance experts have commented this is potentially an ideal time to lock in a low home loan rate and sit securely at a low rate for the next one to five years.

It could also be a good time to consolidate debt under a lower interest fixed-rate loan or refinance to a home loan package with a lower interest rate and potentially pay the loan down quicker by continuing to make the same repayment amounts they currently are.  

The moral of the story seems while it is a good time to explore locking in a fixed rate while they are unlikely to drop significantly lower, conversely, if you are locking in a loan for more than you would usually consider, ensure you’ll be able to service it when interest rates inevitably do arise.

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Words by Melanie Hearse

Sources:

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