The Relationship Between Interest Rates and Loans: What You Need to Know
Interest rates and loans have a close relationship in the world of real estate.
When interest rates are low, it's easier to get a loan and the cost of borrowing is lower. When interest rates are high, borrowing becomes more expensive and can make it harder for people to get a loan. In this article, we'll explore the relationship between interest rates and loans, as well as the changes in the cash rate target over the past decade.
Changes in the Cash Rate Target
The Reserve Bank of Australia (RBA) uses the cash rate target to influence the economy by setting the interest rate that banks use to borrow or lend money. By changing the cash rate target, the RBA can influence the interest rates that people and businesses pay on loans and the amount of money that is borrowed.
Here's a look at the changes in the cash rate target over the past decade:
May 2013: 2.75%
May 2014: 2.5%
May 2015: 2.0%
May 2016: 1.75%
May 2017: 1.5%
May 2018: 1.5%
May 2019: 1.5%
May 2020: 0.25%
May 2021: 0.1%
May 2022: 0.35%
May 2023: 3.85%
As you can see, the cash rate target has fluctuated over the past decade, with interest rates being relatively high in 2013 and gradually declining until they reached an all-time low of 0.1% in May 2021. Since then, the RBA has begun to raise interest rates again, with the cash rate target currently at 3.85% as of May 2023.
Impact of Rising Interest Rates on Homeowners
For homeowners who bought a house in 2021 with a mortgage of $700K and a variable rate loan at an interest rate of 2.6% above the cash rate target of 0.1%, their monthly mortgage repayments would have been around $3,187. However, with the recent increase in the cash rate target to 3.85%, their interest rate would have also increased by 3.75%, resulting in an interest rate of 6.35%. This would increase their monthly mortgage repayments to around $4,407, which is an increase of $1,220 per month or $14,640 per year. This significant increase in mortgage repayments can have a significant impact on their monthly budget and financial stability.
For those looking to enter the housing market now, rising interest rates mean that it may be more difficult to get a loan or afford a property. This is especially true for those who have a high debt-to-income ratio or a low credit score, as lenders may be less willing to take on additional risk.
The relationship between interest rates and loans is an important one to understand, particularly for those looking to buy or sell a property. While low interest rates can make it easier to get a loan and afford a property, rising interest rates can have a significant impact on homeowners and those looking to enter the market. By keeping an eye on the cash rate target and working with a knowledgeable real estate agent, you can position yourself for success in a changing market.
If you are thinking to sell or buy a house, contact Gerard Rohan your local expert real estate agent in Sunshine Coast 4551 area specialist.