As interest rates begin to decline due to the recent 0.5% OCR drop, and with another 0.5% OCR reduction predicted for November 27th, many are asking the same question: What will happen to house prices and where will interest rates land?
While there is a general belief that lower interest rates drive property prices up, at Global Finance, we believe it’s essential to look at the bigger picture. Factors like demand and supply dynamics and market confidence play crucial roles. Let’s break down how these changes could impact you and the broader housing market.
How Declining Interest Rates Influence the Housing Market?
When interest rates decrease, borrowing becomes more affordable, potentially increasing demand for residential properties. Here’s our outlook:
1. Increased Affordability for Homebuyers – Lower mortgage rates result in reduced monthly repayments, allowing more people to either enter the housing market or upgrade their homes. Here’s what you can expect:
* First-time buyers will find it easier to secure a home loan due to increased borrowing power.
* Homeowners looking to upgrade can capitalize on lower rates to move into larger or more desirable properties
* Acceleration in First-Time Homebuyer Activity
2. Acceleration in First-Time Homebuyer Activity– Interest rate reductions can drive significant activity among first-time homebuyers:
* Greater Accessibility: Lower rates expand borrowing power, making it more feasible to secure financing.
* Bank’s Test Rate Reduction: Currently, banks assess loan eligibility at rates between 8.5% and 8.75%, but with OCR drops, this test rate could fall to around 8%. This change could increase borrowing capacity by $50K to $100K for many buyers. However, debt-to-income ratio limits may cap the total amount they can borrow.
* Shift to Fixed-Rate Mortgages: Many will lock in lower fixed rates, ensuring stable repayments over the long term.
3. Economic Growth and Market Confidence– Lower interest rates often stimulate economic growth by boosting consumer confidence and spending. A stronger economy typically supports a robust housing market, potentially pushing property prices higher.
Affordability Concerns in the Long Term
While declining rates initially make homes more affordable, there are concerns for the future:
- Challenges for Low-Income Buyers: Although monthly repayments become easier in the short term, rising property prices could outpace income growth. This could make it more challenging for low- to middle-income families to purchase homes, especially those who already struggle to meet lending criteria.
Where Will Interest Rates Land?
We anticipate the one-year mortgage rate to settle around 5.5% to 5.75% by the end of this year, with the next OCR announcement scheduled for February 19th, 2025. Following this, rates may fall below 5%, potentially offering even better terms for borrowers.
Many borrowers are currently opting for 6-month fixed terms, expecting further rate cuts and hoping to lock in a lower rate when the time comes. To put this into perspective, a 0.5% drop in interest rates on a $700K mortgage could result in savings of around $70 per week. Alternatively, maintaining current repayment levels after a rate cut could help reduce your loan term by 3-4 years.
What Should You Do?
If you’re considering buying a home or upgrading, now may be the ideal time to capitalize on falling rates. However, it’s important to evaluate your long-term financial goals, as rising house prices could impact affordability over time.
At Global Finance, we’re here to provide expert advice and help you make informed decisions in this evolving market. Whether you’re looking to buy your first home, upgrade, or refinance, our team is ready to assist you every step of the way.
Feel free to get in touch to explore how you can best position yourself in today’s changing market.
*The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circumstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.