How interest rate cuts affect mortgage rates and borrowers

• 7 April 2020
• Local News
• 4454 Views

Central Banks around the world have been lowering their interest rates as one of the monetary policy responses to the economic slowdown caused by the COVID-19 pandemic. The Federal Reserve, or FED, of the United States, for instance, has recently cut the rate to almost 0%. The same applies to the Bank of England, the Reserve Bank of Australia, and Malaysia’s Central Bank, who have cut their rate to 0.1%, 0.25%, and 2.5% respectively. The National Bank of Cambodia (NBC) similarly has been, so far,​cutting its rates as well.

According to H.E. Chea Serey, Assistant Governor and Director General of Central Banking, National Bank of Cambodia, theoretically, the objective of interest rate cut is to help stimulate economic growth. Given the low borrowing cost for financial institutions, it can encourage more borrowing and investing, which eventually increases financial and economic activities.

But, what does it mean to the real estate market or mortgage rate in particular?

The interest rate cut does not have a direct influence or correlation with the mortgage rate. However, central banks’ rate cuts can indirectly lower the mortgage rate. In most of the cases, if the interest rate goes down, the mortgage will eventually go down as well, as the cost of borrowing of the financial institutions and the commercial banks is getting lower.

However, it takes time and does not always being so, as there are other factors involved. Though the cost of the borrowing is cheaper for banks, it does not mean that those commercial banks will lend to it general consumers at a lower rate. Demand and supply on the mortgage itself will play a significant role here given in such circumstance. If the mortgage applications are rising, the banks might increase their rates instead of lowering them.

Then as the general consumers, in particular for those who are having a mortgage or planning to have a mortgage, what should we do? Are we benefiting from the rate cut?

According to Mike Brooks, a loan expert from Synergy One Lending, if one currently has a mortgage, check your types of your mortgage contract. If you are holding a fixed-rate mortgage, even though the interest rate cut lowers the mortgage rate in general, it won’t apply to your case. However, what you can do is refinancing, or more simply replacing the existing loan with another loan under different terms. It would be best if you wait until the mortgage rate in the financial market drops before you consider refinancing from any lenders with the lowest rate in the market to pay off the current loan. However, if your mortgage is an adjustable-rate mortgage (ARM), you will automatically benefit as the interest rate will be adjusted based on the current rate in the market.

Besides, the lower interest rate can also give new home buyers more purchasing power. Though the mortgage rate, as mentioned above, is indirectly influenced by the central bank’s rate cut, it will eventually drop in most cases. If the mortgage rate drops, new buyers who are planning requests for mortgages will enjoy the interest rates on their home loan.

Several local experts in Cambodia also echoed the aforementioned theories that such circumstance can give real estate buyers more negotiation power. According to Ms Grace Rachy Fong, CEO of Century 21 Cambodia, the market slowdown is the perfect time for those with extra capital to purchase an affordable property (Read more)

“This is the chance to acquire real estate at a good price. The negotiation process will be easier than normal. COVID-19 is a disease of fear, but I think it will be only a short-term challenge. Therefore, the opportunity goes for those who dare to invest now,” said Ms Fong.

The Cambodian Valuers and Estate Agents Association (CVEA) President Mr Chrek Soknim also claims that investors with long-term vision can seize these opportunities.

“The property price in such circumstance seems to be stable. Thus, investors can easily acquire those properties for future profits. Thus, long-term investment is great potential,” said Mr Soknim.

Besides lowering interest rates, the NBC has also recently urged financial institutions not to foreclose on mortgages, such as on clients’ property, on those clients affected by the economic slowdown precipitated by COVID-19. (Read more)

The NBC also has required banks and microfinance institutions to pay attention to customers whose financial flows are affected and allow them to restructure loan applications, if possible. (Read more)

• Analysis
• Economy and Finance
• Policy and Strategy