How much faster can you save for a home deposit with a higher cash rate?

Interest rates are on the rise around Australia, which is putting downward pressure on housing prices and the amount you can borrow from the banks. Could first home buyers save a home faster in a higher cash rate environment?

How interest rates impact property prices

The Reserve Bank of Australia has hiked the cash rate several times since April 2022, ending an era of cash rate cuts and rock-bottom interest rate loans. Generally, in a lower-rate environment, credit, like a mortgage, is more accessible as the loan repayments will be more affordable for most incomes.

When this happens, the demand for housing may increase as more Australians are able to afford a bigger mortgage size, and therefore there is appetite to purchase property. But when interest rates rise, access to credit can become harder, which often puts downward pressure on housing prices as less home buyers can afford to battle it out at the auction.

The theory is that if house prices become more affordable, then home buyers would need to save a smaller deposit than when prices were at their peak.

So, if housing prices are set to decline, does this mean it’ll be faster for home buyers to save for a property? Not necessarily.

A higher interest rate environment means a greater return on your savings account, and lower house prices generally means a smaller deposit is required. But there are other external factors at play right now, such as inflation and wage growth, that will impact the time it takes to save for a deposit.

Time taken to save a deposit

So, how would saving for a deposit look today? If you were looking to save just a 10% deposit for a $750,000 home, you would need to squirrel away $75,000.

If you can afford to put $200 a week into a savings account paying a rate of 2.6%, assuming no further rate fluctuations, this would take 6 years and 7 months to accumulate a deposit. If you could boost this weekly deposit up to $400, it would take 3 years and 5 months.

Time taken to save $75,000

Source: RateCity.com.au. Based on a savings rate of 2.6%.

Key factors influencing the housing market

It’s not just interest rates that are influencing property prices at the moment, with CoreLogic data suggesting five key factors are at play:

1. Interest rates: As mentioned, a higher rate environment puts downward pressure on home values.
2. Affordability: Property prices have been sky-high for some time and with values well outpacing wage growth, it’s become harder for prospective buyers to access the market, lessening demand.
3. Inflation: Inflation recently hit a high not seen since the 1990s, and higher cost-of-living pressures means less income being put towards home deposits.
4. Higher supply: A rise in listings and newly constructed dwellings, paired with lower auction clearance rates, indicates there’s high supply at the moment. This usually means buyers feel less urgency to make decisions and more price negotiating power.
5. Sentiment: Consumer confidence is at its lowest level since the GFC and the height of the pandemic. Higher inflation and years of out-of-reach prices means that would-be buyers are thinking twice before purchasing property.

If property prices were falling simply because of higher interest rates, then it may be safe to suggest that would-be buyers can save a deposit much faster than before. Unfortunately, the key issue of rising inflation versus wage growth will significantly factor into your ability to save for a home deposit.

The latest wage growth data for the March 2022 quarter has shown a small increase of 2.4% year on year. But this increase to your take home pay is still well behind the latest inflation figures, hit 5.1% over the same annual period. And the Reserve Bank of Australia’s Governor, Philip Lowe, has suggested inflation could hit 7% by the end of the year, so the pressure on your household budget could continue to grow.

Further, home buyers still need to factor in mortgage serviceability with higher interest rates. Property prices could be falling, but you still may not be able to borrow as much as you once could. And with rates tipped to continue to rise, peaking with a cash rate between 2-3% by December, even if you do nab a home loan you’ll need to factor in rising repayments amidst higher inflation.

The good news is that higher interest rates also apply to savings accounts and term deposits. While mortgages may charge higher inflation, so too should your savings account, pushing you closer to your home deposit goal. Not every provider has passed on these hikes to their savings products, so it may be worth comparing your options and researching higher-rate accounts.

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