The Reserve Bank shocked financial markets yesterday by announcing a full percentage point cut in interest rates; double what analysts had expected. But with the current financial crisis and credit squeeze what is the future for Low Doc loans?

The cash rate was lowered for a second consecutive month from 7 per cent to 6 per cent. The move follows a 25 basis point cut by the RBA in September, indicating that rates had peaked. Conditions in Financial Markets is has put a cloud over the Reserve Bank governor Glenn Stevens said “conditions in International financial markets took a significant turn for the worse in September”. It is unclear how much of the cut will be passed on to borrowers as banks struggle to raise funds in overseas money markets.

The RBA said the Australian economy faced the prospect of slowing growth, while inflation would also subside. In the statement accompanying the announcement the board decided “that, on this occasion, an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers. The Board does not however, regard that movement as establishing a pattern for future decisions”.

Investors and property owners may “breath” a sigh of relief, but the outcome of the downturn in financial markets is still not well understood. It is not known whether this will translate to a full 1% rate cut for borrowers.

In light of the current financial situation in the US and Europe which worsened this week, investors will want to look closely at their options. Credit as tightened over the past few weeks as banks move to sure up their lending books. Only quality loans with the very low risk options are being sought. For investors who traditionally buy property on low docs the party may be over even though rates are reducing.

John M Moore President - Property Investors Association of Australia Inc. For more information call 02 9499 9499.

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