Cash Rate Decisions By Reserve Bank Influence Lending Rates

Investing in “bricks and mortar” has for many years been the pathway to financial independence for thousands of Australians. Our real estate market has performed well overall, and our taxation system provides additional incentives that make owning investment properties attractive.

Low Interest Rates Not the Whole Story

One of the drivers of the growth in this sector of the market has been our historically low interest rates. These provided the impetus for a sustained building surge, especially for new apartments close to the CBD. However, low interest rates are not the whole story when it comes to selecting properties that will provide the best return.

The selection process is not something that prospective investors should undertake without some professional assistance. This is where we come in. At Fountain Property Group we have high quality residential real estate suitable for people who want to build wealth through property.

A Quick Lesson on Monetary Policy

We have seen that low interest rates encourage investors into the property market. We also believe that people should go into these ventures with some understanding of the other factors that may affect market returns. Government monetary policy has a big influence on investor confidence, and understanding the cash rate is the key to understanding the movement of interest rates.

Our Reserve Bank, which operates independent of government, has three key responsibilities. They are to contribute to the stability of the currency, full employment and the economic prosperity and welfare of the Australian people. Having a stable financial system is fundamental to promote economic growth, and setting the cash rate is one of the tools the Reserve Bank uses to achieve this aim.

Cash Rate – a Definition

The cash rate is defined as the overnight money market interest rate. Decisions to change this rate are made by the Reserve Bank Board members who meet monthly and make these decisions based on a range of other economic data.

From a high of 17.5% in January 1990 to a low of 5% in August 1995, the cash rate remained relatively stable until it dropped to 3% in May 2009 in response to the GFC (Global Financial Crisis). Apart from a few minor corrections, the cash rate again hit 3% in December 2012 and has remained below that since. It currently sits at 1.75% with any adjustment made being in the order of -0.25% percentage points.

No Dramatic Changes Expected

The absence of unexpected fluctuations in the cash rate has given investors some certainty when making decisions about entering the property market. This does not mean that interest rates will not rise given the right circumstances, but as the cash rate has been stable for some time, the market is not expecting any dramatic changes any time soon.

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RBA To Consider Rate Cuts In 2015

The Reserve Bank has discussed the possibility of further rate cuts for next year, according to the recent release of their December 2 meeting – their last for the year.

The RBA decided to keep the interest rate at 2.5%, believing that this is enough to stimulate growth in the economy. However, further policy easing may take place early 2015 depending on the performance of key economic factors, such as the Australian currency and the inflation rate. The board members also agreed that the low interest rates have supported strong activity in the housing sector and that it is necessary to keep the rates at the current rate – and possibly lower, to support the strong market demand.

Read more about this on the Smart Property Investment website.

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2 of Australia’s Big Four Predict Rate Cuts

A second major bank has forecasted rate cuts for 2015, shortly after Westpac announced the same last week.

The National Australia Bank became the 2nd bank of the Big Four that forecasts the cash rate to drop by 0.25% to 2% as early as March next year, with a second rate cut expected in August. NAB’s forecast was driven by the low GDP growth for the third quarter, as well as unfavorable economic conditions and slow growth for the coming year.

Read more about this on the Adviser website.

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Are Interest Rate Cuts Ahead For 2015?

The RBA is expected to go through the last meeting of the year with no surprises, as it is expected that the official cash rate will remain at the historic low of 2.5%. Despite previous predictions of a rate hike in 2015, more people are convinced that rate cuts are ahead, as the economy shows signs of weakness to end the year.

Bank based economists are still convinced that rate hikes are the way to go, but further easing could very well happen – with market economists expecting it to go as low as 2%, as the unemployment rate is predicted to peak to 6.75% in 2015.The country’s trade has also been affected as the price of iron ore has dropped to almost 50% from the start of the year.

Read more about this on the Sydney Morning Herald website.

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Official Cash Rate On Hold At 2.5% Since 7 August 2013

Without causing much stir, the Reserve Bank has kept the Official Cash Rate at a record low of 2.5%, after holding their second – last monthly meeting of the year on Melbourne Cup day.

The cash rate has remained at these levels for the past 15 months and experts surveyed by are unanimous in predicting that the rates would remain on hold. This period of stability will encourage high activity in the property market, as sellers would still have enough time to list before the expected market slowdown on Christmas.

Speculations on the next rate hike are divided, with Westpac expecting the increase to happen as late as August next year.

Read more about this on the Smart Property Investment website.

What You Need To Know About Interest Rates And Loan Types

At Fountain Property Group we do our best to help our clients create wealth for themselves by investing in property. We are experts in our field and property investment is by far one of the most effective ways to move toward taking financial control of your future.

When you buy a property it pays to be well educated about your decisions in choosing the right investment as well as which is the best lender, amongst others. It also pays well to understand interest rates. While many home buyers know there are interest rates to be paid, some don’t know more than it affects their back pocket.

If you would like to know more about how interest rates work then keep reading in order to make a more informed choice about your home loan.

Decisions by the Reserve Bank of Australia

The board of the Reserve Bank of Australia (RBA), meet the first Tuesday of every month. In this meeting the official cash rate is discussed and what it should be. As a general rule, the rate will increase if the economy is possibly going to heat up or it will lower when the economy slows down.

When the rate of inflation is at the higher end of the scale it is not likely that there will be a cut to cash rates.

How the decision affects banks

If the RBA raises the cash rate the banks tend to follow suit and raise their interest rates, this rise will then flow down the line to affect your mortgage repayments.

A savvy investment property owner will pay close attention to the rates so that they can possibly negotiate with their bank for a better rate or consider looking elsewhere with another bank to re-finance. The rates will also affect your mortgage differently, depending on your loan type.

Standard variable home loan

Standard variable home loans can have features such as an offset account; a redraw facility, the option to make payments sooner if needed and flexible payment terms. This is the more common of the mortgage types although the one used most by first-home buyers is the basic variable loan.

Basic variable loan

The basic variable loan is just as the name states—basic. There are no features offered but it is cheaper than the standard variable loan. The payments on the basic variable are scheduled, so if you wish to close the loan early there may be a penalty to pay.

Fixed interest rates

The fixed interest rate is an option to take where the rate will be fixed or locked in for approximately one to five years. There is a gamble on this type of mortgage that means you may miss out on any cuts to rates but it also means you win if the rates are raised higher than your fixed rate.

At Fountain Property Group we are able to provide outstanding financial advice on top of our investment property sourcing services. To learn more about what we do and why you can put your faith in us, click here

Record Low Interest Rates To Remain At 2.5% Until September 2015

The Reserve Bank has recently released a statement saying that the Official Cash Rate will remain at record low levels for about a year, after their decision to keep it at 2.5% in their September meeting, increasing the interest rate streak to 13 months.

The RBA cited the decrease of housing loans to 15 basis points as one of the major drivers in keeping the rates at 2.5%, and that forecasted property demand should taper off property price increases in the future. The RBA is also pleased with the current status of the mortgage market, saying that current policies and lending standards have met their expectations.

Read more about this on the Adviser website.