The ultimate 2025 finance forecast for property buyers

If you’ve been nervously waiting for the RBA to deliver some reprieve to your mortgage repayments, don’t despair. There’s no doubt that rates will fall in 2025. The big question is when, by how much, and how often. We have a few clues.

Economists at the big four banks are also expecting rate cuts in 2025, with the first 25 basis point reduction occurring as early as February. They each tip a total of four cuts across the year.

The timing and frequency of cuts they’re backing are perhaps a little on the optimistic side. Financial markets aren’t pricing in a rate cut until April, and the most bullish prediction I could find on the number of cuts we’ll see next year came from AMP, with three over the course of 2025.

We’ll see how it plays out.

My money is on the first rate cut occurring in March or April. I agree that it’ll be the standard 25 basis points because the RBA won’t want to spark a frenzy. But if economic conditions deteriorate, we could see bigger cuts, and more, later down the track.

It should be said that around this time last year, the major banks were offering similar predictions for 2024, nominating when they thought rates would begin to fall at long last and by how much. Of course, as we look back in hindsight, we know none of those tips paid off.

But what the big banks didn’t do while making those forecasts was start to cut their own rates in anticipation.

That’s what they’re doing now. Fixed rates are already beginning to tumble, which is only something that happens when lenders are sure the RBA is preparing to move. They get ahead of the market to make it worth a borrower’s while to take up their product. 

I wouldn’t fix just yet, though. At least not entirely.

We even just saw NAB lower its variable interest rate, undercutting its major competitors in offering a discount to new customers. Sure, they’re probably also reading the tea leaves, but they’re also hinting at another trend that will take hold in 2025 – that of banks becoming extremely competitive when trying to land your business.

The mortgage market is already incredibly spirited. Banks are bending over backwards to lure in new customers and keep their existing borrowers from refinancing. If more heat comes out of property markets just as rates begin to fall, expect that competition to become even fiercer. 

I’m talking discounted rates, introductory offers, fee reductions and cash-back bonuses. When the banks want to protect their market share – or grow it – they can get very generous.

You’ll probably see plenty of advertisements for these offers. Resist the temptation to jump in blind and rush to take up the first deal you see. Speak with a qualified and experienced adviser about what’s right for you, your strategy and your personal circumstances.

Not only will they ensure you’re not missing some important fine print, or selling away your financial soul for a small piece of silver, but they can assess the full mortgage market to see if there’s an even better deal out there.

Higher interest rates, low affordability and localised economic jitters have seen markets run at different paces for the past several months.

Sydney has stagnated and its growth has slowed significantly. On at least one recent measure, prices slipped modestly in October for the first time in a long while. Melbourne is now clearly going backwards, with few signs of recovery on the horizon. Brisbane’s record-breaking growth has been reigned in too, it seems.

Depending on politics and the economy, Victoria could see the beginning of a recovery next year, given there will be some good buys going on top of lower interest rates. The biggest disincentive continues to be the huge land tax impost imposed by the Allan/Andrews Labor government that is seeing many investors flee the Victorian market. Sydney’s continued strong population growth will put a floor under its market to a degree too but it continues to be a difficult proposition just to get into the market for young people. And Brisbane’s prospects remain bright, and there’s a fair level of construction activity in the pipeline in popular pockets. Not too mention a certain thing called the Olympic games that are coming to town in 2032.

I predict the story of next year will be similar to 2024 – Perth and Adelaide lead the charge. There’s still huge pent-up demand, they have strong and robust local economies (in fact, WA is the No.1 performing economy in the country and they just passed 3 million residents of the state after stealing the crown from SA, which has been the best performed state economy for the previous 2 years and still remains at No.2 in the country), and both are continuing to see strong interstate and overseas migration. 

Plus, while prices have grown incredibly, the buying in Adelaide and Perth compared to major markets on the east coast is pretty enticing. Relative affordability coupled with jobs growth and infrastructure investment makes for a compelling recipe.

Across the board, I predict that the stunning instability we’ve seen in the construction sector will ease. Put bluntly, there’s simply too much work and ever-growing demand to see those who remain face the prospect of going bust. That said, don’t expect building costs to reduce anytime soon. They will probably moderate, but heavy discounting is unlikely.

There’s no denying that it would take an earth-shattering series of events to make buying your first home in Australia an easy prospect. The simple reality is that the deposit hurdle is incredibly high.

Unfortunately, the bank of mum and dad needs to remain open indefinitely for most would-be buyers.

But lower interest rates and easing price growth will be of benefit to first-timers thanks to less competition on the ground and cheaper mortgage servicing costs.

And there’s a whole host of government schemes designed to make owning a home easier, from deposit guarantees to shared equity schemes. They’re well worth exploring. Speak with us about what’s on offer, whether you’re eligible, and how to throw your hat in the ring.

First-timers will also benefit from another big shift that I tip will occur next year.

Once interest rates begin to fall, mortgage serviceability will improve at long last. This means that the amount a homebuyer can borrower will lift, giving those in the market for a property a bit of breathing room that they haven’t had for years now.

With the inflation beast begin tamed, I also predict the servicing buffer that lenders must take into account will shift.

This buffer is currently set at three per cent. That means, anyone asking a bank for a home loan is assessed on their ability to meet repayments at the current interest rate, plus another three percentage points on top. It hurts. It’s made getting an approval for the amount you need pretty tough. But once inflation is back under control, I can’t see any reason for the buffer not to be lowered. I think from about midday through the year, we’ll see it back in the range of two, maybe two-and-a-half per cent.

And everyone will benefit from that.