Interest rates are unlikely to be cut in the near future while demand will continue to boost house prices

While interest rates remain on hold, banks are unleashing a wave of seductive lending schemes that could trap unwary homebuyers for decades, writes finance guru Noel Whittaker.

Beware bankers bearing gifts.

The Reserve Bank has spoken — and no surprises there: rates are on hold. But let’s be honest — it’s obvious the pressures driving inflation are far from under control and could even be intensifying. The big question now is, what next? Every employer I speak to says their costs are soaring, and to make matters worse, they can’t get staff. It’s especially bad in the building trade. According to Master Builders Australia, we’re short more than 200,000 tradies — and that gap won’t close any time soon.

Think about the Reserve Bank’s job. If the country’s in trouble and needs stimulus, they’ll cut rates. If inflation’s booming, they’ll hike them to slow things down. I don’t see any rate increases coming — not in the near term. But there’s no way they’ll be cutting either. We may well be at the bottom of the rate cycle, which means last month’s cut could be the last we’ll see for quite some time.

Noel Whittaker.

House prices come down to supply and demand — and with supply so limited, demand is where the action is. And demand is booming. Adding fuel to the fire is the government’s first homebuyer scheme, which lets people buy with just a 5 per cent deposit and no mortgage insurance. It’s well-intentioned, but it’s heating up an already overheated market. Every new incentive to “help” buyers only drives demand higher — and sends prices even further out of reach.

And there’s more to this dangerous mix – several things that are happening now in the lending area.

First, the banks are going gung-ho luring borrowers directly to them – CBA has been advertising up to 300,000 Qantas Frequent Flyer points for new loans, and recently announced an offer of extra borrowing capacity – up to $40,000 more – for applicants willing to rent out a room in their home to boost their income.

Some non-bank lenders are now offering 40-year mortgages. Extending a home loan from 30 to 40 years can make repayments look more manageable, but the real cost is brutal. On an $800,000 loan at 5.5 per cent, over 30 years the monthly repayment is about $4542 (interest roughly $835,000), versus about $4,126/m over 40 years (interest roughly $1.18 million). And it risks people remaining tied to mortgage payments in their sixties or seventies, when they should be free to retire.

Demand will mean home prices are unlikely to go down. Picture: David Clark

Then there’s AMP Bank’s new 10-year interest-only loan, which requires no reassessment of the borrower’s finances during that period. With no review for a decade, there’s no check on whether the property has held its value or whether the borrower can still afford the debt.

These products may make it easier to qualify for a loan, but they’re a step back from the disciplined standards regulators fought hard to enforce. APRA has repeatedly warned lenders not to chase growth at the expense of prudence. It has identified high loan-to-income ratios, extended terms, and long interest-only periods as major red flags. The regulator insists banks maintain a 3 per cent serviceability buffer and hold extra capital against riskier loans. The message is clear: competition must not come at the expense of sound lending.

All this tells me we’re heading into choppy waters. The housing market runs on emotion, and when confidence is high, people take bigger risks. But history shows easy money and loose lending always end the same way.

Wealth is built by keeping things simple and avoiding costly mistakes. If you’re thinking about borrowing, take the time to run the numbers and don’t let clever marketing cloud your judgment. Don’t be seduced by bonus points, tiny repayments, or flashy products. Always check the total interest you’ll pay and think carefully about how long you want to stay in debt. The banks may be relaxing their standards — but you shouldn’t relax yours.

Originally published as Interest rates are unlikely to be cut in the near future while demand will continue to boost house prices