A seismic shift in the Australian housing market is on the horizon as the Reserve Bank of Australia (RBA) considers its first interest rate cut since the COVID-19 pandemic. If implemented, this move could provide homebuyers with access to up to $50,000 more in borrowing power. However, while this presents an opportunity for buyers, it could also trigger a rise in property prices, making homeownership even more competitive.
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How Much More Could You Borrow?
A recent analysis by Canstar reveals that an interest rate cut could increase the borrowing capacity for prospective homebuyers across the board. Currently, a single person earning the average full-time salary of $100,292 has a borrowing limit of $534,200. With a rate cut dropping the cash rate to 4.10%, that same individual could see their borrowing power rise by $12,000.
For families, the increase is even more significant:
- Couple with two average full-time wages: Borrowing capacity rises from $1,029,700 to $1,052,700 (+$23,000)
- Family with 1.5 incomes (one full-time and one part-time earner): Borrowing capacity increases from $666,800 to $681,700 (+$14,900)
These calculations assume an owner-occupier mortgage on a 30-year term at an average variable rate of 6.24% and are based on banks fully passing on a standard 0.25% rate cut.
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Why Multiple Rate Cuts Could Be a Game-Changer
The RBA is widely expected to introduce multiple rate cuts over the next 12 months, with some experts predicting up to four reductions. If this forecast holds true, a single homebuyer could see their borrowing capacity jump by over $50,000 before the end of the year, while families could qualify for significantly larger home loans.
Sally Tindall, research director at Canstar, explains, “A rate cut will immediately boost homebuyers’ borrowing power, increasing confidence in the market and potentially driving up demand. While this is great for buyers looking to maximize their budgets, it also risks pushing property prices higher.”
Could Home Prices Surge as Demand Rises?
Historically, interest rate cuts have been linked to rising home prices. A study by CoreLogic found that national dwelling values typically increase by 6.1% for every 1% drop in the cash rate.
The potential impact on house prices could be dramatic in some key suburbs:
- Leichhardt, Sydney: Median home value currently $2.329 million, expected to surge 19.1% (+$460,000) if rates drop by 1%
- Warringah, Sydney: Median value at $2.4 million could rise 18% (+$432,000)
- Whitehorse-West, Melbourne: Median home price of $1.4 million could jump 18%
- Hurstville, Hornsby, Sydney Inner City: Expected double-digit price growth
Eliza Owen, Head of Research at CoreLogic, explains, “Lower interest rates generally fuel stronger growth in high-end markets like Sydney and Melbourne. If borrowing capacity increases, demand will follow, potentially making it harder for first-time buyers to enter the market.”
How Homeowners Could Benefit from Lower Rates
For existing homeowners, an RBA rate cut could offer immediate relief on mortgage repayments. If banks pass on a 0.25% cut in full, homeowners with a $600,000 mortgage could see monthly repayments drop by $92. While this may seem modest, a series of cuts over the next year could significantly ease financial strain.
However, financial experts caution homeowners to check with their lenders. “If a rate cut is announced, borrowers should call their bank and ask if the reduction will be applied to their mortgage. In some cases, borrowers may need to request the lower rate,” Tindall advises.
Will Buyers Face a Ticking Clock?
For those looking to purchase a home, timing is crucial. If rates continue to fall, borrowing power will increase, but so will competition and home values. Many economists suggest buyers act before the market fully reacts to the anticipated cuts.
With RBA Governor Michele Bullock holding the key to the next rate decision, all eyes will be on the central bank’s next move. Whether this change will truly make homeownership more accessible or simply push prices even higher remains to be seen.
For now, the housing market is at a pivotal moment, and homebuyers may need to decide quickly before property values rise in response to Australia’s new era of lower interest rates.
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