Emmanuella bought a home at the market peak. Now she has room to breathe

Northcote home owner Emmanuella Grace bought her forever home close to the peak of the market, and has been feeling the pressure of interest rate rises.

She welcomes the Reserve Bank’s decision on Tuesday to cut the cash rate to 4.1 per cent, and says even a small reduction in her mortgage will help her family. But she’s concerned the savings won’t make up for other rising expenses.

“It gives us some breathing room as a family; it’s been really tight with childcare fees going up … Everywhere we turn things have got more expensive, and [the rate cut is] not going to be balanced out by how expensive things have become.”

Grace, a singer and communication consultant, and her financier husband bought in February 2022; they took on a large loan to buy a large house on a big block that needed to be renovated to meet their needs.

“We really put all the eggs in this basket,” Grace said. “I remembered every week or so we’d get a letter [which said repayments were increasing] … you kind of just go: ‘Oh god again, oh god it’s happening again, and how far can this go?’”

The 0.25 percentage point rate cut will help Grace’s family make ends meet. “Given the size of our mortgage, the smallest cut [makes] a big difference for us,” she said. “It adds up really quickly, and it would just give us some room to breathe.

“It’s not like I’m going to buy a Lamborghini with what I save, but I will buy myself some ballet classes for my kid.”

The arts worker in her 40s, who has two children aged three and six, worries the recent cost-of-living crunch has affected access to the arts and strangled small businesses.

“Even though the rate cut’s come, we don’t know how the economy is going to behave in the next 12 months,” she says. “My other concern is that it’s too little too late … while it’s great there’s been some reduction in the rate, my biggest concern is what the long-term effects will be on a community level.”

Modelling from loan comparison platform Canstar shows an owner-occupier who took out a $500,000 home loan in April 2022 would be paying back $3190 a month by now.

That’s $1238 more a month than when they took out a loan. One rate cut will save them $77.

Canstar data insights director Sally Tindall said stressed borrowers would take any savings they can and either pay it off their mortgage or bring it back into their household budget.

“In the context of things, it’s literally a drop in the ocean, when you put it against how far the monthly mortgage repayments have risen,” she said.

“But borrowers that have been stretched to the nth degree know not to sneeze at a 2 per cent drop in their monthly repayment.

“Every single dollar counts at this point in time.”

Home owners who borrowed their maximum at rock-bottom rates have been feeling the heat, she said, but have prioritised paying their mortgages over discretionary spending and have saved money into offset accounts.

Westpac senior economist Matthew Hassan said the rate cutting cycle is expected to be slow and measured over the course of the year, and buyers hoping to increase their borrowing capacity shouldn’t expect interest rates to sink as low as they did in the COVID period.

“This [interest rate cycle] will be a slower pace … taking us back to something neutral rather than the really low rates that we’ve seen in the past,” he said.

“It’s still relief, it’ll breathe a little bit more life into the consumer and housing sectors, but for those hoping for a decisive and big shift, it’s not quite there.”

Axton Finance mortgage broker Luke Rowland said some of his clients had reduced household budgets and discretionary spending amid high interest rates to service their loan repayments.

“People just have to adjust expectations. We’re not in a market where you can get through without budgeting,” Rowland said.

“During the COVID periods, we may have been able to do that, but I think everyone’s had to tighten the purse strings as the market has become more restrictive.”

Rowland said that while a rate cut would help ease pressure on household budgets, borrowing capacity remained limited for new buyers.

Hassan said the cut would bring relief for some home owners but would do little to ease housing affordability in Melbourne.

“The affordability side of things is still challenging,” he said. “The market, in terms of prices, has moved significantly higher over the last two years where we’ve had high interest rates, and while rates are starting to cycle low, they won’t really compensate for that change in terms of affordability.”