Mortgage rate cuts: First-home buyers weigh up their options

A first-home buyer has welcomed the drop in interest rates thanks to the Reserve Bank’s decision to cut the Official Cash Rate (OCR) by 50 basis points last week but mortgage brokers say deciding which rate and duration requires careful consideration.

Sam Somers was bidding for his first house in an auction room last Wednesday when the OCR cut was made.

“It gave us a bit more confidence when we were bidding with the auction in terms of comfortability with the repayments and what we could afford.”

Somers wasn’t able to lock in a special rate with 20% equity, but decided to stick with his bank ANZ, seeing the bank’s home loan rates as “pretty competitive”.

He said the chance to finally own his first property was incredibly exciting after waiting for the right time to enter the market.

“Yeah [it was] pretty nerve-wracking, obviously not knowing what to expect but we got through the process in the end and managed to come away with our first home,” Somers said.

Jeff Royle, a mortgage broker with iLender, welcomed the OCR cut and what it means for the market but said it was important to look under the hood.

“So interest rate relief is brilliant. It’s at just the right time. But the real thing for first-home buyers is more what they call the test rate or the stress rate,” Royle said.

Royle said that at the peak, the stress rate was roughly 9.15%, now it’s close to 8%. He said this gives first-home buyers much more headroom when evaluating how much they can borrow.

“The rate to watch is not the rate you pay, the rate to watch is the rate you’re assessed at. And I think that will be down in the mid-sevens by the end of the year.”

He also said that although first-home buyers or others seeking a loan may not get their preferred option of going with a bank lender, there were alternative options.

“It could be just your situation doesn’t fit bank policy. There are some very good alternatives out there and they may be more expensive, but generally speaking, it’s short-term.”

Duration discretion

Somers hasn’t quite confirmed a home loan rate but is committed to getting a six-month fixed term for an eventual loan, deciding early on that a floating or longer rate wasn’t the best decision for his family.

He made the decision thanks to advice from his mortgage broker and friends who owned houses.

They believed six months was the best option due to further OCR cuts likely to come in November and February next year.

“Obviously we did look at floating, but again, it’s still up around that 8% mark, which is doable. But I mean, if you can get [around] 6%, it’s a lot more comfortable,” Somers added.

Sam Somers and his wife Lee-Anne are first-home buyers weighing up their options for home loans following the OCR cut last week.

Twine Financial Advisers mortgage expert Eugene Bartsaikin said getting the loan duration right for first-home buyers depended on their situation.

“Someone who’s simply strategising on, ‘I’ll take the shortest rate possible on the bet that the rates are falling’, yes rates are falling, but are they gonna fall by enough to justify the premium of the shorter-term rate?”

Bartsaikin said there was a need to weigh up the pros and cons of a six-month rate, a one-year rate, or maybe even a variable rate.

“When rates start getting much closer to one another, we can utilise a split-rate strategy because we don’t know exactly what’s gonna happen, but we can spread the risk.”

He said that it can help to think of one-year rates as two six-month terms, where the second term benefits from a lower rate due to the difference between them.

While separate six-month terms could mean a lower rate on the second term following further cuts, the likelihood it matches a current one-year rate is slim.

Bartsaikin also said borrowers needed to keep in mind debt-to-income ratios which the Reserve Bank established earlier this year.

“At this point, they don’t really mean anything. But as interest rates continue to fall, they will be kind of like a guardrail to prevent excess levels of debt.”

He believes the latest changes signal the market entering a new cycle, so planning ahead is crucial.

“The banks are under a lot of pressure at the moment, and so the time it takes to turn around an approval gets longer all the time,” Bartsaikin said.

He encouraged anyone thinking about entering or continuing to invest in the market to start having conversations earlier as the next phase begins.

“As borrowing power improves, as interest rates get cheaper, the repayments get lower, people will generally also spend more as well.”

Bartsaikin, however, was cautious about increases in house prices as people potentially choose to not sell their houses, believing they could earn more in future.

Both Bartsaikin and Royle said it was likely that borrowers new and existing would re-evaluate following further OCR cuts, potentially increasing demand.

As for Somers, he does plan to re-evaluate his eventual loan following further OCR decisions but said the latest cut helps a lot.

“Once we do have the mortgage in place and whatnot, it’s just knowing that we’ve got a little bit more cash to spend on other daily living expenses as well.”

Tom Raynel is a multimedia business journalist for the Herald, covering small business and retail.