Behind the numbers: making sense of the cash rate

by AB08 Aug 2018

Yesterday, The Reserve Bank of Australia announced that Australia’s cash rate would remain at its historic low of 1.5% for the 24th consecutive month.

Despite the hold, Canstar recorded more than 160 rate changes in July as the cost of wholesale funding increased. As a result, reports claim more Australians are struggling to meet repayments and are using their savings to cover everyday expenses.

Canstar group executive of financial services Steve Mickenbecker, explains the recent developments and how brokers can leverage the market to their customers’ benefit.

According to headlines, mortgage stress is on the rise and borrowers are using their savings to cover costs. Looking at the wider lending landscape, what is the economic impact of another rate hold?

Two years at 1.5% is quite amazing. To keep the rate there is the most benign situation you could expect really. I would have been really surprised to see rates drop because, as much as savers would like the rate to move, it just can’t right now.

The RBA has to see wage inflation before rates go up and that’s because in spite of everything else we are below the target range to begin with for inflation and there is a little capacity for people to meet higher repayments.

The average loan repayment is now around 40% of income. That’s very high and it’s at the point where, if a rate increase does go through, it’s starting to look pretty unaffordable. People aren’t far enough ahead with their repayments to really give you a level of comfort that they can absorb a higher rate so it would just add to the stress. This is as good an outcome as the consumer can expect quite frankly.

What is the bottom line for brokers and what can they do to try and ease the stress for some of their customers who find themselves struggling?

This is where we have had a really interesting environment over the last couple of months. We have seen rates moving in all sorts of directions. It’s sort of a classic thing you see at the top or bottom of a cycle; you get that sort of volatility where nobody really knows what do to.

Brokers should be looking out for the special rates on offer, whether they be fixed or introductory, because they can actually give a very favourable outcome for the customer over the first few years of their loan.

Obviously introductory rates end and you have to keep an eye on this – it can put you in a position where you say you will take the three year intro rate or two years fixed rate – you have to take the view that you’re refinancing in a few years’ time. Of course, you have to ensure you are credible for refinance when that time ends.

Last week, RBA governor Philip Lowe, said sustained low interest rates could have a net negative effect on the economy. With your perspective and experience, what’s your reaction to that?

The reason Philip Lowe is saying that is twofold.

One it’s an indication that the market doesn’t expect high growth and two, he has the view that people are not on the best rate a lender has. That can put you in a position where you really do have to take the view that you will be refinancing in three years’ time. Once you’re in that situation, you have to be confident that you will still be credible and there will still be an appetite to refinance you in three years’ time. Philip Lowe has the view that people make high-risk decisions in low rate environments and as such people have been encouraged to take on debt. That in itself is dangerous because one day rates will go up.

What is your economic outlook at this point?

The world economy is set for growth and when it does – and china grows in particular – Australia will do very well with its resource growth. It won’t create many jobs as the last resource boom because new mines aren’t going to be commissioned straight away but the real risk is trade wars with the US and China, for example. Those are going to cause real dramas for global growth and will really endanger the recent recovery from the GFC. The global economy is too fragile still and it’s too soon to put it under that pressure.

What is your outlook to the end of 2018 in respect to the rate rise and Australia’s ability to meet its debt obligations?

What people are forgetting is that firstly, rates are at an all-time low and secondly, most people didn’t borrow when rates were through the roof.

Most people’s mortgage is a couple of years old, they have built up equity and had a chance to get on top of their repayments a little bit. It is the recent buyers who will be in trouble over this more than anyone else.

Repayments have been increasing because the size of mortgages has ballooned because of the price of housing in Sydney and Melbourne. These are the borrowers who  are going to do it tough in the short term.

Longer term though, if the rate goes go up by 2% that’s when a whole lot of people are going to start feeling it.

The more recent buyers are already struggling with this. They bought over the last couple of years when prices were high and they have a large mortgage –  even it won’t take much of an increase for them to feel it a bit.

People who have been in the market for a bit longer, their mortgages aren’t as high because and they will be able to absorb more of an increase.

 

Related stories:
Majors will move rates “sooner or later”
"Long odds" against RBA rate move

 

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