Mozo Money Moves: TD rates ramp up ahead of an RBA cut, as single home buyers pay the price.

This edition of Mozo Money Moves comes as we prepare for the next cash rate decision from Australia’s central bank, the Reserve Bank of Australia (RBA).

This week there has been one noticeable shift in one of the Big FourBank’s rate cut predictions and a flurry of term deposit increases for terms under one year, as banks raise short-term interest rates to attract savers who want to lock in higher rates before the cash rate cuts begin.

The Mozo research team has also dived into the most recent ABS release on the median dwelling prices to find single buyers on an average income are being priced out of the housing market.

RBA Moves

There are just two business days left until the RBA makes its cash rate decision for June, and the consensus is that the central bank will hold the cash rate at 4.35%.

While three of the Big Four banks are still predicting an RBA cut in late 2024, on Tuesday ANZ was the first Big Bank to push back rate cut forecasts to next year, and now expect a cut in February 2025.

“The good news for mortgage holders is that another hike is unlikely, and that it will take a significant uptick in inflation to push the RBA to hike the cash rate again,” Mozo’s personal finance expert Rachel Wastell explains.

“The not so good news is that the meeting next week will not bring mortgage holders the rate relief they’ve been waiting for and will need to hold on for a little while yet.”

Although the European Central Bank (ECB) made its first rate cut last week, it's unlikely the RBA will follow suit by cutting on Tuesday. As RBA Deputy Governor Andrew Hauser said at an event last Friday ; “In Europe, there has been a very persistent lack of growth” and the aggregate growth rate in Australia “has had a pretty positive story to tell [in comparison] to continental Europe.” 

This ‘pretty positive’ growth is what is keeping the RBA cautious in their stance to cut rates too early and then having to hike again in response.

Despite a small dip in the unemployment rate to 4% on Thursday, this was in line with the RBA forecasts for the second quarter of this year, further confirming the consensus of a prolonged rate pause.

“Unemployment data aligning with RBA forecasts suggests that the economy is heading in the right direction to return inflation to the target band in 2025,” says Wastell.

“I’m confident that, unless there are any major inflation surprises, we have reached the peak of the rate hiking cycle, and borrowers will finally see a long awaited rate cut within the next 6-12 months.”

BIG FOUR CASH RATE PREDICTIONS

RBA insights

• Home loan watch: when will interest rates finally come down? Mozo dives into the Big Four bank predictions as to the first RBA rate cut.
• Unemployment rate meets forecast, ANZ says no cuts until 2025, rate cuts begin in Europe and Aussies prepare for the June 2024 RBA rate decision
• Decisions from RBA policy meetings have big impacts on everyday Aussies. So how often does the RBA meet and what decisions can they make?

Term Deposit Moves

Over the past week we’ve seen 16 lenders increase interest rates on Term Deposits, with a focus on shorter terms, enticing savers with competitive rates before the first cash rate cut, after 13 rate hikes, arrives from the RBA.

There have been limited changes to term deposits with longer terms over 12 months as the rate cut predictions sink in, and in June just two providers have made changes. The Mutual Bank increased 2-3 year rates today, and QBANK cut 1-5 year rates at the beginning of the month.

“Rate movements in term deposits have focused on hikes for those shorter terms, suggesting that banks are betting on a rate cut within 12 months, and attempting to entice savers while still ensuring they can meet their bottom line.”

“Banks often move term deposit rates to match expected changes in the cash rate, so they can attract savers with competitive rates while also maintaining profitability. The pause in hikes for longer term deposits reflects the consensus that a cut is likely the RBA’s next move and should arrive in the next 12 months.”

“For savers considering a term deposit, the main appeal lies in the ability to secure a fixed interest rate over a chosen period, without meeting conditions associated with higher bonus rate saving accounts," says Wastell.

“Locking in a high interest rate on your savings now, before the RBA starts cutting the cash rate can shield you from any rate reductions, and can offer an opportunity to capitalise on the high rate environment we’re in.”

"Just make sure you can commit to not touching your savings for the entire term, as early withdrawal can incur hefty fees, and possibly nullify any accrued interest."

TERM DEPOSIT RATE LEADERS

THIS WEEK’S TERM DEPOSIT CHANGES

Term Deposit insights

• A number of smaller brands are currently offering short term rates that could be useful for stashing your hard-earned cash in for a few months.
• Recently, term deposit providers have turned away from higher interest rates for longer terms, but who’s the current rate leader in term deposits?
• Can you dip into your term deposit before the maturity date? The short answer is yes, but there are some major caveats to consider.

Home Loan Moves

This week, Mozo also released new research showing single buyers are being priced out of the housing market.

Using the average variable rate on the Mozo database, the ‘Mean Dwelling Price’ and the average earnings data from the Australian Bureau of Statistics (ABS), Mozo showed meeting monthly repayments is an almost impossible task.

Before tax, across Australia, home loan repayments as a percentage of average income is a whopping 65%. After tax, that figure jumps to 84%.

In New South Wales, where the mean dwelling price is $1.2 million, the average single earner is completely priced out, as monthly repayments consume a staggering 106% of their after-tax income.

“With skyrocketing home prices and rising interest rates, the proportion of income needed to service a mortgage is at a record high, making it increasingly unlikely that singles can afford to buy a home on their own,” said Wastell.

“It's becoming increasingly clear that without substantial financial support or creative co-buying solutions, the dream of homeownership for singles is slipping further out of reach.”

Wastell advises that one of these possible alternatives for singles is to co-buy a home with family or friends, but this approach requires careful planning and legal safeguards.

“By pooling resources, singles could increase their buying power and share the burden of high repayments, making it easier to enter the property market.”

“Collaborating with family or friends to buy a property can be a smart move, but it's vital to approach it with clear agreements and have everything in writing.”

Home Loan Repayments as a % of income (before tax)

Home Loan Repayments as a % of income (after tax)

Mozo insights for co-buying property

• Formalise Agreements: Have everything in writing. Formalise the arrangement with a legal agreement that outlines everyone's contributions, ownership percentages, and what happens if one party wants to sell their share.
• Get Legal Advice: Applying for a joint home loan can increase your borrowing capacity, but it's essential to seek legal and financial advice to understand the implications.
• Have a Clear Exit Strategy: Establish a clear exit strategy in case someone wants to move on or sell their share of the property. This should be part of the initial agreement, under the guidance of a legal representative.

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As a part of Mozo’s commitment to making your money count for more, each month we “roundup” the rate changes, key banking trends and money moves in the Australian personal finance market. 

If you’d like to see the analysis in full once it’s released, you can subscribe to receive the Mozo Banking RoundUp here.

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