Is the RBA done with rising rates?
Many borrowers are coming off their fixed rates, unemployment is rising and borrowers are not being able to meet new repayment buffers. There’s no doubt that 9 back-to-back rate rises by the Reserve Bank of Australia (RBA) is causing financial strain for us. The RBA, under heavy scrutiny this week, has suggested that more rate rises may be necessary, but economists believe that the RBA has already done enough & we agree, or hope, this is the case.
Watch this short snack-sized video or read below for the detailed version of this month’s update.
Rate hikes - too many or not enough?
Last week, the RBA Governor Dr Philip Lowe stated that “further interest rate rises would be needed”, although some experts, such as Westpac's Matthew Hassan and AMP's Shane Oliver, believe that the RBA may have already done enough to control inflation. Dr Lowe has acknowledged the possibility that the RBA may have gone too far with the rate hikes, risking a slowdown in the economy, but also noted the potential danger of not doing enough to bring inflation down. The ultimate outcome here for the RBA and their decision on what they do with rates next month and into the year, will depend on economic data, including retail sales, jobs outcomes, and monthly inflation data.
Fixed-rate cliff
According to the RBA, approximately 880,000 loan facilities with fixed rates are maturing this year. Which means some borrowers locked at 1.79 to 2.4 per cent could be in a dire position as they move to a variable interest rate of 5.5 per cent in the coming months. Some economists believe this “fixed rate cliff”, will put the breaks on general spending and further support the case to hold on further rate rises. The RBA noted during the week that while 50 per cent or so of borrowers were well ahead on their payments, about 10 per cent had no spare cash flow and buffers.
Passing the assessment rate into unchartered waters
Australian banks were historically required to add a serviceability buffer of 2.5 per cent to the loan product interest rate when determining an applicants servicing ability. By doing this, the banks were safeguarding the borrower against future rate rises. The Australian Prudential Regulation Authority (APRA) in October 2021 increased this buffer to 3 per cent. This meant Australian banks were required to assess your ability to meet your repayments at an interest rate of say 5.5 to 5.9 per cent, back then.
Now that rates have reached this mark after many rate rises, it presents a challenging environment for some people. In particular for those who were only just meeting servicing benchmarks back then and have not had a real increase to wages.
What are the banks doing
For existing borrowers, some of the banks have offered to put some stressed borrowers onto interest-only terms to reduce their monthly repayments. For new borrowers, some of the lenders have not passed on the most recent full rate rise to all their products, only passing on .10, .15 or .2 of a per cent, not the full .25 percent of the most recent rate rise. In commercial banking, we’ve had some of the big banks even take on applicants who’s servicing may not be fully apparent but who’s exit strategies or asset strength or future cash flow projections have been able to get them over the line.
RBA Governor grilled
The Reserve Bank of Australia, and in particular its Governor Dr. Lowe, has faced significant scrutiny and political pressure due to comments made about the timing of potential interest rate increases. Dr. Lowe appeared before the Senate and House of Representatives to address the issue in an enquiry during the week. Some view this enquiry as an example of tall poppy syndrome or scapegoating, while others believe it is a necessary enquiry and that the Governor should be replaced. Inflation is a significant concern for many people, as it increases the cost of goods and puts pressure on budgets and savings, as we know. There are so many factors here at play that make the economic landscape tricky to navigate for our politicians and in particular, our RBA.
Final thoughts
It seems likely that interest rates will increase at least once more, but whether or not this trend will continue depends on how quickly economic data changes both locally and globally. We believe there’s one more rise to go at Black & White Finance – fingers crossed. The Reserve Bank of Australia is walking a tightrope, as getting interest rates wrong by even a small margin could have catastrophic consequences. Leading the RBA under such circumstances is an incredibly challenging task though, especially knowing that people's lives are being negatively impacted by rising mortgage payments. Can you imagine being the RBA boss at the minute?
As these rates rise, it's important to ensure your lending solution is in your best interests to tackle this challenging period and that each loan application is with the lender who’s conditions meet your specific requirements. We've worked very hard to create long-lasting, fostered relationships with all the 30 plus lenders on our panel, to ensure all our borrowers here at Black & White Finance are on the best terms available. Our finance strategies now more so than ever, need to be smart and in our best interests, to tackle this inflationary economic landscape.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of our amazing Mortgage Broker Sydney – Black and White Finance team, we will be able to support you.
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