For the first time since the Reserve Bank of Australia (RBA) began hiking interest rates in May 2022, markets are now pricing in the possibility of four interest rate cuts within the next 12 months.
It's a welcome prediction for many homeowners who have been feeling the financial squeeze after a series of aggressive rate hikes.
But what does this really mean for the average Aussie with a mortgage, and how should property investors view this development?
The ASX's rate predictions
At the end of each trading day, the ASX publishes its RBA Target Rate Tracker, which gives us insight into how the markets are pricing future interest rate movements.
Based on short-term futures contracts, the tracker is now predicting that the RBA will cut interest rates by 25 basis points as early as February 2025.
Furthermore, the market believes that three additional cuts could be on the way by August, potentially bringing the Official Cash Rate (OCR) down from the current 4.35% to 3.35%.
Average Aussie mortgage repayments
| Cash rate | Average home loan rate* | Average monthly repayment | Average monthly decrease | Average annual repayment | Average annual decrease | |
|---|---|---|---|---|---|---|
| September 2024 | 4.35% | 7.07% | $4,296 | - | $51,552 | - |
| 1 rate cut | 4.10% | 6.82% | $4,189 | $107 | $1,284 | $1,284 |
| 2 rate cuts | 3.85% | 6.57% | $4,083 | $213 | $2,556 | $2,556 |
| 3 rate cuts | 3.60% | 6.32% | $3,977 | $319 | $3,828 | $3,828 |
| 4 rate cuts | 3.35% | 6.07% | $3,873 | $423 | $5,076 | $5,076 |
Source: Finder, RBA, ABS. *Owner-occupier variable discounted rate. Repayments based on the average loan of $641,143 (ABS data analysed by Finde
These cuts, if they materialise, will come in a year where the RBA will meet eight times—plenty of opportunities to adjust monetary policy based on evolving economic conditions.
However, it’s crucial to remember that these predictions are just that—predictions.
While the markets may be pricing in rate cuts, it doesn't mean they are guaranteed.
What would four rate cuts mean for homeowners?
If we do see four rate cuts over the course of 2025, homeowners could be in for some meaningful financial relief.
According to ABS data, the average Australian mortgage is currently $641,143.
Finder’s analysis shows that four rate cuts, reducing the OCR from 4.35% to 3.35%, could save the average homeowner $5,076 per year in mortgage repayments, or around $423 per month.
Even a single rate cut could offer homeowners a reprieve, with the average repayment decreasing by $107 per month or about $1,300 annually.
For the two in five homeowners currently struggling to meet their mortgage repayments each month, these savings could make a world of difference.
As Graham Cooke, head of consumer research at Finder, points out:
“Four interest rate cuts would offer significant relief to homeowners struggling with rising mortgage repayments.
It’s important to remember that these predictions are based on probability, and the future is still uncertain.
Many households have been feeling the squeeze following 13 rate hikes—a series of rate cuts would save Aussies hundreds of dollars per month on variable-rate home loans.”
The property market dilemma
While rate cuts might alleviate some financial pressure on current homeowners, they could also have the unintended consequence of reigniting demand in the property market.
Lower borrowing costs would naturally encourage more buyers to enter the market, potentially driving up property prices once again.
As Cooke elaborates:
“While rate cuts might alleviate some financial pressure on current homeowners, they could also reignite demand in the housing market, potentially driving up property prices again.
This would make it harder for first-home buyers to enter the market, even with lower borrowing costs.”
We’ve seen this dynamic play out before, particularly after the COVID-19 pandemic when record-low interest rates fueled a property boom, pushing prices to unsustainable levels.
While lower rates can be beneficial for those already in the market, they can further challenge those looking to buy, especially in major capital cities where affordability remains a major issue.
What should homeowners and investors do?
For homeowners on variable-rate mortgages, even one rate cut could offer significant savings.
But it’s important to remain cautious.
The ASX’s predictions are not guaranteed, and the RBA could still choose a different path depending on economic conditions.
For those on fixed-rate mortgages, the benefits might not be immediate, but homeowners whose fixed terms are ending soon could be in a better position to refinance at lower rates.
Many borrowers have faced sharp increases in their repayments when moving from their fixed-rate loans to higher variable rates, and these potential cuts could present opportunities for better deals.
Cooke points out that:
“Homeowners on fixed-rate mortgages might not immediately feel the benefits of the cuts.
However, those whose fixed terms are ending soon could see better refinancing options when their loans revert to variable rates, helping them avoid the sharp increases many have faced in recent years.”
Meanwhile, property investors should also pay close attention.
A lower interest rate environment could present more favourable borrowing conditions, encouraging investment activity.
However, the flip side is that increased competition and rising property prices could diminish returns if you’re buying in an already inflated market.
As always, it’s essential to stick to the fundamentals and not get caught up in speculative market movements.
The bottom line
While the prospect of four rate cuts over the next 12 months could bring significant financial relief to Australian homeowners, it’s important to approach these predictions with caution.
The markets are pricing in potential cuts, but as Cooke reminds us:
“The ASX is clear on its site that the information is indicative only, meaning that while the market may be pricing in the possibility of four rate cuts, this is not a guarantee that the Reserve Bank will take action.”
In short, homeowners, investors, and first-home buyers alike should keep a close eye on the evolving economic conditions and be prepared for a range of outcomes.
While the potential for rate cuts offers some optimism, it’s essential to remain financially flexible and not make any hasty decisions based purely on market predictions.
