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Reserve Bank's Financial Stability Review highlights effects of decreased cash rate

On Sep 27 2013
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  • News

After the official cash rate was lowered to a historically low 2.5 per cent earlier this year, ...

After the official cash rate was lowered to a historically low 2.5 per cent earlier this year, there has been a lot of speculation about the effects that this will have on the economic environment of Australia, especially in relation to home loans and interest rates.

The Reserve Bank of Australia (RBA) recently released the latest Financial Stability Review (FSR), which highlights some of the changes that have occurred since the cash rate change.

It appears that the cash rate has had the desired effect on the consumer population, with confidence in the market beginning to climb. For example, fixed rate home loans have experienced an increase in popularity amongst people buying residential property.

While they only comprised 9 per cent of the home loans sought and approved in July 2012, this grew to a huge 19 per cent in July this year. This can be attributed to buyers in the market looking to secure lower interest rates for their set repayment periods while they are sitting at a low level.

Furthermore, there is little financial concern amongst the consumers of Australia when it comes to their outlook on the future. In fact, many households across the nation are actually paying off their debts faster than normal.

According to the FSR, in the wake of reduced interest rates, around half of households retained their original repayment amount rather than decreasing it, which contributes to a faster repayment and a smaller amount overall.

The lower interest rate and increased confidence in the market has led to more people using their self-managed superannuation funds to invest in property.

This also means more people are making riskier investment choices?, which makes it important for them to keep their wits about them while they're purchasing property through these avenues. Seeking professional advice would be advisable for anyone considering this.

One side effect of these superannuation investments is it has the potential to begin exacerbating the price of property and hiking up the overall value of the market, with consumer protection concerns being raised as a point of thought within the review. 

Overall the cash rate reduction has spurred more people into buying a home for owner-occupation purposes, or try their hand at property investment while the possibility of securing a fantastic home loan deal is still available.

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