February 2025 Rate Cut: What It Means for Property Investors

This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Straight into this episode with interest rates, because whilst I'd love the intros, say who we are, all that stuff, we'll get to that.

Interest rates have been cut, they've been announced, and why I want to jump straight into that one is last episode, or maybe it was the episode prior, me and Jackie threw out a few predictions on what would happen with interest rates. Now, I said that they should decrease it this year, or this month, for the call, being in Feb, but they probably won't. Now, Jackie and I both agreed, and they did actually decrease it, which is the right thing to do, but it looks like the pressure came in, they finally caved. Jackie, how's that feeling now? What's the phones and emails like ever since that happened?

What's happening? Mate, it's blown up. I think I underestimated how many people were actually waiting for that announcement. It was pretty interesting to see, you know, they made the announcement 2. 30.

By 2. 35, my phone was blowing up, like just all these clients coming out, people I haven't spoke to in a while, they're just letting me know. Obviously, I was watching it at 2. 31, I saw it, I was like, yeah, good, good. Although we were wrong, I'm glad I was wrong, because I know there's a lot of people need it, and yeah, it's really going to start to open up a lot more for people.

Yeah, so big learning on that is, you know, if you're going to ask us for interest rate tips, we're not the guys to speak to. But if you're going to ask us for property, finance, my world, maybe NBA tips, and then your horses, we'll do okay in those avenues, huh? But I think what's interesting to find is like a lot of people are calling, a lot of people are emailing, it's going crazy right now. But is the numbers as crazy as the phones and emails suggest? And what I mean by that is like the numbers on borrowing capacity, because I get it that phones and emails are buzzing for both of us, but what about the numbers in borrowing capacity?

Like, is it as big as people are thinking of it to be? Well, to put it into perspective, right, from a borrowing capacity or like a loan repayment point of view? Borrowing capacity. Yeah, so borrowing capacity, not really. It's not going to make the difference.

Like if you were tapped out, it's not like you're going to be able to borrow again. It might make minor differences to give you a slightly higher deposit or slightly higher purchase price. But generally, if you were waiting for this rate cut to make your move, you probably could have done something anyway. The numbers won't change too much. But from a repayments point of view, like on an 800K mortgage, you're saving about 130 a month, right?

So that's not a major difference. It might be enough to put a smile on your face depending on your circumstances. But I'd argue that most people can shave off 130 bucks a month from their budget just by looking at what they're spending rather than waiting for a rate cut. But, you know, it's definitely, I know a lot of personal friends and, you know, clients that definitely happy about it. They're not going to say no to a rate decrease.

But most lenders, I'd say, I mean, I would say all lenders, especially for the rate cut, would for this first one would actually decrease their existing book and new to bank by the full 2. 25. They don't have to, though. Like a lot of people think, oh, the RBA has reduced their rate. My bank's going to reduce their rate.

That's not always going to happen. They don't always do it to the full amount either. Some have, some will. They don't all have to go to the whole 0. 25, right?

Which I find is interesting. It's a sure way to lose customers if you do that because it's like, well, everyone else does it. You don't. It's a silly way to do it. But they know that.

So for the first one, because everyone's like everyone, the anticipation, it's all over the news, like everyone's waiting for the rates to go down. The first one, I really anticipate all lenders passing down the full discount because people are aware of it and they know it. Right. But when when they start, maybe for the next one or the one after that, I think at that point we're probably going to see like instead of a 0. 25 decrease, maybe like a 0.

15 for the existing book and new to bank. Like I saw that a lot during COVID. Yeah. And, you know, when when the RBA increased their rate, no doubt all the banks put it up by the exact same amount. But when they were decreasing pretty, pretty fast, it yeah, like they kind of hit it in the middle somewhere where they didn't pass down the full discount.

So I don't like it was funny, actually, the same day the rates came out that afternoon, there was there was emails from lenders just saying, yep, we've we're going to decrease the rate usually takes about three weeks. So I'm not sure when this podcast comes out, but it should be just before mid-March that those those rate cuts should come into effect for existing clients. Well, I mean, what's interesting to say about that is like you're right. There's some banks who don't didn't go the whole way through in COVID time. And what's really what I find funny is that they increase it really quickly.

And when they do it, like you said, they do it in full. But when they decrease it, I just wonder how much margin spreads there just to do like a day later or two day later versus a month. My gut feel is when you're talking like the mass book sizes, then you're talking the net interest margin, like the difference between cutting that in 15 days, two days or 30 days could be like millions of dollars. Yeah. Right.

Yeah. And so in my head, I'm just like that. I bet you they know that they could decrease it faster. Yeah. But they make it three or four weeks.

I mean, look, we can instantly transfer money across banks. Yeah. Like we can instantly log into an app and check our banking. Like I can go to a branch and they can change my name if I show my ID that's changed the middle name and address instantly. But it takes 30 days, takes 25 days because they want to collect those margins on the way through.

So I get you on that one. But when it comes to interest rates, I know like what you were saying before, that was a really interesting point. Like two to three percent is my estimates from when we were chatting earlier about borrowing capacity improvements. Right. Now with two to three percent, that's not going to rock the boat in terms of your next purchase.

But that means there must be so many people who could have made moves. Yeah. But they're just sitting there going, I'm not going to make a move until the whole world goes crazy that something's dropped and interest rates have come down. Yeah. Where's the logic behind that?

No, it's funny. The last podcast we were actually talking about people that look, we don't think the rate's going to go down, although it did. But you still shouldn't be sitting there not knowing what you're sitting on and just not taking action. And people actually reached out as a result of that podcast. And, you know, the people that are still waiting, the rate cuts gone now, they probably still could have done something earlier.

And they're just missing out on some opportunity cost in the market. Yeah, 100 percent. I mean, I always took my personal scenario with my wife just to make sure that we're like, are we acting as we say? And this was a really special moment where I looked at since 2015, when I first got my first place to now 2025, I've just got to make a move this year. And if I make a move this year, that means every year for 10 years I would have made a move in the investing space.

And the purpose isn't that every single person has to aspire to that. But the purpose of me sharing that is that with me making a move every single year for 10 years straight, it's to show that it didn't matter if there was a pandemic. It didn't matter if interest rates are going down, unemployment going up, labor threatening negative gearing going to be cut, borders being shut, interest rates now coming down again, businesses getting locked down. Like it didn't matter. Like at the end of the day, my future matters for many reasons.

I've got a family to take care of. I've got generations to build wealth for. I'm able to do certain things for friends, my team, my clients as a result of my position being strong and not acting from a place of scarcity. And so if you can do all of these things, your life will change. So do not look at the news announcements and do not look at the craziness going there and just be like, oh, now it's my time because the world is telling me it's a time to do it.

You've got to be accountable for yourself. You've got to be responsible for yourself and go every year. If I can, I will. And if I can't, I can't. And don't feel like there's shame in going, I can't, I can't.

And, you know, you don't do it because pre-2015, was I doing everything every single year? I wasn't. That was my first hit. So it took me time to get to there. And Interest rate cuts, they're not expecting it, some are expecting it, what are you seeing is happening?

Because the governor was a bit interesting with their thoughts in terms of saying, oh, look, this is just one cut, don't think we're going to decrease more. What do you think? Yeah, well, historically, when they do reduce rates, they do it fast. Maybe it's a little bit different now. Yeah, it's really hard to say because even the RBA don't do what they say they're going to do.

So they could change their mind on a day's notice. Some would say they misled the public when rates were really low and they said it was going to stay that low for a really long time and then they shot up. So you can't really take them on their word, unfortunately. I think a percent decrease in the year is very reasonable, but it could very much be more than that. We've seen them, we always think that the only decrease or increase is going to be by 0.

25, whereas there's been times where they've decreased it by 4% in just one meeting, historically. So you just don't know. It'll be trending down, though. That's the main thing. So we've got a lot to look forward to this year.

Yeah, I think that trending down on historics is a big thing to call out because, yes, I know we might be in a slightly different time to some areas, but the past is also a good measuring stick for the future. And if you see how fast interest rates have come down almost all the time, they've done that. I think the key thing to note here is that the RBA governor is saying this in that way just to keep the dialogue so people don't go too crazy off the bat, right? Because then you've got like, let's start cutting, let's start spending again. Because there's going to be a few people, there's going to be some people who go, okay, I've got a million dollar mortgage and I'm saving 0.

25 on interest and that's $2,500 a year. And that $2,500 a year is like them thinking their investing hat on, what can I do next? But then there's other people who go, that $2,500 a year is a nice little gift for myself each year. I think the fear, the language that he's using is a fear that this is going to change the sentiment in a way where there's going to be a lot more spending and there's going to be more inflation on the back of it, which is what they're trying to avoid. So maybe him speaking like that is, yeah, but we'll see.

We'll see. We'll see what she gets up to on the next one. But when it comes to interest rates, that was obviously one thing I wanted to note and talk about because that's been the hot topic. One thing I'm proud on the interest rates is I resisted the urge to send an email to my database yesterday and say, interest rates have cut because there were at least, I think I got like 30 plus emails in like a span of 10 minutes to say RBA has cut interest rates. And so that was one thing I'm just going to be like, I'm proud of that.

I didn't do it the same time everyone else did. So to all our 40,000 plus subscribers to our newsletters, thank you and hope you enjoyed that. You had one less email that day from us on interest rate cuts. We will send something out though. We did say something out the day after just to say like, hey, this is our thoughts on it all.

But I wanted to share, I wanted to check in with you on one more thing, Jack, which is interest rates are one borrowing capacity shifter, but not a huge one. It will compound over time. Yes, we know sentiment's been the biggest thing that's going to change now because as you said, our phones, emails have been blowing up, but they've been blowing up because it's people thinking they can do something or want to see if they can do something rather than actual changes in borrowing capacity. Has there been anything that's come up on your desk of late from the banks where you've seen some unique policies that are worth shouting out or maybe like unique ways that banks are looking at stuff that you think may make people go, okay, if I didn't know about this, I should start looking at this. And even if it kind of gets a little niched, that's cool.

Just want to see what you've been seeing out there. Nothing major, honestly. I think when the rates went up really high, it took some time for the lenders to adjust their policy to allow for more lending to go through the major channels because I think a lot of that market share was going towards non-bank lenders, third tier lenders, and the major banks kind of loosened up their policy to make it easier for people to borrow with them. Since they've done that though, there hasn't been a lot of changes, honestly. It's been pretty stalemate since then.

Right now, I don't think they're going to adjust too much because it literally happened yet. It's only been one rate cut. So I haven't seen any new policies coming out. I don't think they would need to adjust it too much. I think if anything, they might have to make it a little bit more strict because borrowing power would be coming back.

So nothing yet to report, like minor things, but nothing major since the decrease. I know there's been something though that might not be new to you, but it is something I've kind of heard and felt that like, hey, this is bigger than what most people talk about. And it's that self-employed world. Self-employed financing has always been traditionally really tough with like lots of tax returns, notice of assessments, business financials. But we're noticing a lot more lenders come your way where you're saying they're actually offering simpler ways to do reviews of income.

It doesn't need so much time in business as it once did. What are you seeing out there? Because I know we have a lot of business owners as customers as well of ours, but also business to this show. What are you seeing? You're right.

It's old news for me, but it might be new news for the listeners. New for me, for sure. It's good to know. Well, a lot of times if you've been a sole trader and then you transition to a company, a lot of lenders would be happy with that continuance if it's the same sort of business structure. One year financials, I mean, five years ago, maybe one or two lenders would look at one year financials.

Now we've got like five, six. So using wages that you pay yourself from your company. And on that one year thing, just to butt in, just because that's a really big point. Some business owners go through, like I'm thinking of a few use cases. Some business owners go through like us, we have a reinvesting year every other year.

So it's like one year, our profits dip substantially because we're investing back into the business. But then the next year, our profits rise substantially because that investments come through the line. And so would that be a good use case to say your two years are way off each other and you've had a really good year and we can isolate it and just look at the one year? And then second use case, if I'm understanding right, is if someone hasn't been trading for so long, that one year can help them as well. Yeah, well, funny enough, it used to be like from a major lending point of view, it used to be the minimum was 18 months and one lender would do 18 months ABN registration and one year financials, but it has to be 80% LVR.

Now there's a lot more flexibility there. More lenders have opened up to doing it at 18 months and some are even doing it at 12 months. And as long as you've got one year financials and you've got some continuance with your industry, but even brand new company, 12 months ABN, major lending, major bank lending. So it's really good, really good. But like wages as well, like if you haven't done any financials, but you're giving yourself consistent wages, like you can look at six months worth of that, which is might be leaving.

That's a good one actually, like because if you're like really, you know, you've got ups and downs on financials, you're not getting them timely through, but you're paying yourself a regular wage. It depends on where you're at, like what you want, because generally if you're at that higher end of your limit and you're really trying to be aggressive, you're probably going to need those company profits. But if you're just, you know, want a simple, smooth process and you just, you know, why show all my company financials? I know they're good or, you know, I don't need them for this particular application. Just use the wages and that's fine.

Yeah, awesome. That's a good tip. I wanted to share that with everyone because we've been getting requests of late to go, hey, if you get any unique servicing, unique scenarios or policies that are worth knowing, each episode we'll touch on a little bit of different policies that are out there. They might be very well known to Jack or myself, might be things that are common, but we all know that there's listeners from all sorts of backgrounds, whether it be business owners, certain types of professions, we'll keep shouting out little things there that you know that could be an X factor. And it could be the difference between you getting one place to two to three to four, or it could be the difference between you being in the home that you're at, but upsizing the right home or getting into the suburb you want to.

So we'll keep doing that each episode.