Doing the numbers

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Should you wait for interest rates to drop before buying property?

It’s a question that’s on the minds of many Australians while interest rates continue to hover at elevated levels. The allure of waiting for a potential 1% drop in two years is undeniable with the promise of lower monthly repayments and potentially more borrowing power. However, the decision isn’t as simple as it seems as waiting also means risking missing out on the potential for substantial capital growth.

For a hypothetical:

  • $800,000 property
  • 20% deposit of $160,000
  • Loan amount of $640,000
  • 25 year term
  • 6.4% interest rate today
  • 5.4% interest rate in 2 years
  • with 1% difference in interest rates
  • = $386 pm monthly saving on repayments
  • = $9,264 savings in 2 years

IF property prices DO NOT GO UP.

That’s a considerable sum that could be put towards your deposit, other financial goals or simply improve your cash flow.

 

However, waiting comes with a potential downside…

Rising property prices.

The ANZ CoreLogic Housing Affordability Report 2024 released in April this year predicts a 5% increase in house prices across capital cities in 2024 and a further 7% in 2025. If these forecasts hold true, the same $800,000 property could cost you an additional $98,800 in just two years. This means that the savings you might accrue from lower interest rates could be easily dwarfed by the increased purchase price.

 

The power of capital growth

While predicting property price movements with absolute certainty is impossible, historical data provides valuable insights. Over the past 30 years, Australian property has demonstrated a consistent trend of long term growth.

According to CoreLogic, the national Home Value Index has increased by 382% over the past 30 years, translating to an average annual growth rate of 5.4%. While this doesn’t guarantee future returns, it highlights the potential for property to be a lucrative long term investment.

Let’s look at the above scenario of 2 years with only a 5% property price increase each year:

Source: https://moneysmart.gov.au/home-loans/mortgage-calculator

 

The balancing act

Affordability vs potential gains

The decision of whether to wait or buy now ultimately boils down to your current personal financial circumstances and risk tolerance. If you’re comfortable with the current interest rates and have confidence in the long term potential of property, buying now might be the more strategic choice. This allows you to lock in your purchase price and potentially benefit from future capital growth.

On the other hand, if you’re more risk averse and prioritise lower repayments, waiting for interest rates to fall might seem more appealing. However, it’s crucial to acknowledge the risk of missing out on potential capital gains and the possibility of property prices surging while you wait.

 

Seeking guidance

Navigating the complexities of the property market can be daunting. Consulting with industry specialists is highly recommended to gain personalised insights and guidance tailored to your specific situation.

 

Financial advisers can help you assess your:

  • superannuation
  • risk tolerance
  • financial goals and
  • the potential impact of different scenarios.

Their guidance empowers you to make an informed decision.

 

Our finance team can help you:

  • assess your current borrowing capacity and
  • potential mortgage repayments.

There’s no one-size-fits-all answer

It’s about striking the right balance between affordability and long term potential.

Whether you choose to wait or buy now, remember that property investment is a long term game and making a well informed decision is key to achieving your financial aspirations.