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New record lows ahead: Your mortgage rate could be slashed further

Arial view of property and Aussie dollars. Source: Getty Images

Fancy a mortgage rate of 3 per cent? Maybe a little less?

Within the next few months, mortgage interest rates are on track to fall to fresh record lows, probably below 3 per cent.

That is the overwhelming message to come from the Reserve Bank as it struggles to deal with the soft economy where inflation is tracking at record lows, a long way from returning to the 2 to 3 per cent target range.

The futures market is close to fully pricing in official interest rates being cut a further 75 basis points to a stunning 0.25 per cent by the middle of 2020.

While the totality of these interest rate cuts are unlikely to be fully passed on to mortgage holders, strong competition within the mortgage market will see mortgage rates fall from current levels around 3.5 per cent down below 3 per cent.

This is a stunningly low borrowing cost for those buying a house.

It also means that housing affordability in much of Australia will be at its best level in many decades.

How much could you save on your mortgage?

Over the past two years, house prices have dropped 10 per cent, a time when mortgage rates have fallen markedly and household incomes have risen by over 6 per cent, even though wages growth has been weak.

A 3 per cent mortgage interest rate will mean that monthly repayments on a $400,000 mortgage, repaid over 30 years will be under $1,700. This is down from almost $2,300 a month when interest rates were 5.5 per cent.

Looked at another way, for that $2,300 monthly repayment on a $400,000 loan when rates were 5.5 per cent, the same monthly repayment is required for a mortgage just under $550,000 when interest rates are 3 per cent. That is an extra $150,000 of borrowing capacity.

Either through a higher borrowing capacity or a lower monthly repayment, housing affordability is extremely favourable.

It’s time to negotiate on your mortgage rate

It is a good time to negotiate a lower interest rate given strong competitive pressures because no one should be paying more than 4 per cent even before the next few interest rate cuts are delivered.

It should be reasonably clear what this means for house prices.

Already house prices are starting to edge up as the impact of lower interest rates and favourable affordability attracts new buyers.

Easier credit conditions are also feeding into stronger housing demand.

If interest rates do fall as the market is pricing and there is further strong ongoing demand from first home buyers and strong population growth, house prices are set to register solid gains for the next year or two.

It would be reasonable to expect nation-wide house prices to rise 5 to 10 per cent between now and the end of 2020, with the strongest gains likely in Perth, Sydney and Melbourne.

Rising house prices will help to support household wealth levels, an issue that has a strong influence on consumer spending.

All of which points to a better year for the economy into 2020 driven, in large part, by the RBA coming to its senses and delivering aggressive interest rate cuts in a simple yet effective measure to boost economic growth.

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