Help to Buy Delays – Rethinking Your Loan Strategy
The Labor Government’s long awaited "Help to Buy" scheme, aimed at helping first-time buyers enter the property market, has been postponed once more in the Senate. The Liberal Party and the Greens oppose the scheme, arguing that it won't solve the housing crisis. If you’ve been fortunate enough to buy property already, perhaps using one of the existing first home buyer schemes, it’s potentially time to consider fixing a portion of your debt. We touched on it last month, that we could see the US drop their interest rates, and they did this week. We also touched on fixed rates last month and this week we saw some super low principal and interest, 1 and 2 year fixed rates become available. With the Reserve Bank of Australia (RBA) expected to keep the cash rate steady at 4.35 per cent in their upcoming meeting, these lower fixed rates are starting to look attractive.
Housing Affordability Crisis
Housing affordability has hit its worst point in 30 years, according to Proptrack. Three years ago, 43 per cent of homes were within reach of median-income earners. Today, only 14 per cent can afford a home. Rising interest rates, property prices, and inflation are making it harder, with NSW, Victoria, and Tasmania being the least affordable states.
Can “Help to Buy” Make a Difference?
The "Help to Buy" scheme, in its attempt to solve the housing crisis, offers up to 30 per cent equity for existing homes and 40 per cent for new builds, with buyers needing just a 2 per cent deposit. This equity share must be repaid though, and critics argue the scheme doesn’t address the core issue - housing supply. The program is capped at 10,000 eligible households per year over four years.
It's important to note that this 30 or 40 per cent, or whatever the portion is, will be required to be repaid over time and if you sell, the government needs their portion back. While this will help many first home buyers, the argument against this initiative is that it simply doesn’t propose to build any new homes and supply is one of the reasons, amongst many, which is causing the housing crisis.
Political pressure on the RBA
We’ll know in November whether an agreement on Help to Buy will be reached. In the meantime, there’s also pressure on the RBA to reduce rates. Treasurer Jim Chalmers has been extremely vocal about his claims that the RBA is “smashing the economy”.
While central banks in the US, UK, Canada, and New Zealand have started cutting their rates, it’s important to understand that these economies raised rates higher than what Australia did, so they have more room to ease.
Economists: Rate Cuts Unlikely Until 2025
Most economists, including those from Wesptac, ANZ, Judo, AMP, CBA, NAB, and Macquarie, expect the RBA to hold rates until early 2025. Although the US Federal Reserve cut rates by 50 basis points recently, it’s not expected to impact the RBA’s decision directly. ANZ’s economists suggest the RBA may start easing in February 2025, but with the labour market staying strong, the timeline could be pushed back.
The labour market saw another solid employment rise in August of 47,500, according to the Australian Bureau of Statistics.
Is It Time to Fix Your Loan?
Even with inflation persisting, as can be seen with these strong employment figures, money markets continue to keep yields low, and banks like Macquarie and ME have responded with even lower fixed rates—down to 5.59 per cent for 2 years and 5.89 per cent for 1 year. In comparison, variable rates are around 6.2 per cent.
For fixed rates to lose their appeal, the RBA would need to cut rates by 50 basis points or .5 of a per cent, as seen in the US. The key question is: How likely is a rate cut, or 2, or 3, in the next 12 months? Banks have priced these rates to attract borrowers, so it’s worth considering the risks and reviewing your options.
Final thoughts
With ongoing political debates over Help to Buy and interest rates in particular, staying focused on the data and your own financial strategy and objectives is essential. Fixed rates are dropping, and the RBA is expected to keep rates steady for now, making this a good time to review your loan and consider fixing part of it. Or maybe wait a little while to see if these fixed rates come down even lower. Staying informed about market trends and their impact on rates will help you make smarter decisions, and being proactive with your debt strategy could lead to significant savings.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of our amazing Black and White Finance team, we will be able to support you.
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