Reserve Bank makes big rate call

Mortgage brokers react to decision

Reserve Bank makes big rate call


By Jayden Fennell

The Reserve Bank of Australia has lifted interest rates for the fifth consecutive month, in an ongoing effort to tackle high inflation.

At its meeting on Tuesday, the RBA board decided to increase the official cash rate by 50 basis points from 1.85% to 2.35% and the interest rate on exchange settlement balances to 2.25%.

This is the fifth rate increase in 2022. The RBA has pushed the rate up from 0.10% to now sit at 2.35% following its September 6 board meeting.

Australian Broker spoke to two mortgage brokers about the impact of the RBA’s latest increase to the cash rate.

Stephanie Smith (pictured above left), director of mortgage broking at Finance CBR said with interest rates rising again today, it meant brokers would continue to have difficult conversations with their clients.

“It ensures borrowers who are paying too much will be able to look at moving to another bank to get not only get a better rate, but also the possibility of the cash back with promotional offers which allows the next increases to be paid for,” Smith said.

“It also allows the broker to see potentially what their investment client’s requirements are to ensure that their properties are kept in a position that repayments are not more than their rental income.”

The Canberra broker said it would be hard for first home buyers, single families and low-income earners to get into the property market with housing prices still high and their lower borrowing capacity.  

“Pre-approvals will also be effected as someone who is approved right now might not be when the increase to rates comes into effect, which will mean their capacity to buy will be lowered or even declined due to no longer servicing,” she said.

“Mortgage brokers needs to ensure that they are discussing this situation with their clients and make sure they can service with the continued increases.”

Smith said homeowners would need to tighten their spending habits to ensure they were not overspending or overindulging.

“It will place a tighter budget on households but also for homeowners pre COVID-19,” she said.

“These interest rate rises are now not uncommon.”

Smith said mortgage holders could prepare for future OCR rises by trying to reduce liabilities, consolidating unsecured loans or credit cards and moving to a one payment scenario.

“It will help with budgeting to ensure that future rises do not affect your monthly repayment too significantly as you will only need to be paying one item instead of multiple,” she said.

“This will allow you to use your funds usually spent on a personal loan to be used as extra payments on your loan to an offset account or savings.”

In its monetary policy statement released on Tuesday, RBA governor Philip Lowe said the board was committed to returning inflation to the 2% to 3% range over time and was seeking to do this while keeping the economy on an even keel.

"The path to achieving this balance is a narrow one and clouded in uncertainty, not least because of global developments," Lowe said.

"The outlook for global economic growth has deteriorated due to pressures on real incomes from high inflation, the tightening of monetary policy in most countries, Russia's invasion of Ukraine and the COVID containment measures and other policy challenges in China."

Lowe said inflation in Australia was the highest it had been since the early 1990s.

"It is expected to increase further over the months ahead," he said.

"Global factors explain much of the increase in inflation, but domestic factors are also playing a role. There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy."

Kimberly Linder (pictured above right), principal at XCEL Finance in Sydney said today’s RBA outcome provides a fantastic opportunity for brokers to be the voice of reason to their clients during a time of uncertainty.

“We can help by taking the time to review a client’s individual situation and prepare a plan to navigate them through the current environment,” Linder said.

“The majority of my clientele have held mortgages for many years, so it is about having an honest conversation reminding these clients that they have held these loans in a much higher interest rate environment and we are simply returning to more normal times.”

Linder said it was an everyday narrative for her to stipulate that “the rate” is not the only factor that is important in a financial transaction and there were many things that contribute to the client’s wholistic outcome.

“The increase to the OCR is a great opportunity to review your client’s lending, secure better rates for them and make sure that their current loan is still serving their best interests,” she said.

“Broadly speaking, higher rates mean lower borrowing capacity, so we may see a drop-in investor activity. My belief is that first home buyers will dominate the market over the coming years as the current rate environment is their ‘normal’ so they will be assessed and approved at current capacity and will buy within their means.”

Linder said mortgage holders should consider their personal due diligence, understand their own financial situation and adjust their personal expenditure.

“Reach out for help with a budget and review all things financial, it is amazing the savings you can make simply by asking for a better deal,” she said.

“Many homeowners will be insulated over the next one to three years having fixed their rates in at historically low rates. This provides a lot of relief and should provide the perfect opportunity to save to create a buffer for the harder times when they come off their fixed rates and onto a higher rate.”

“I honestly believe my clients and the average Aussie are resilient and sensible and we have an amazing ability to adjust. Our banking industry is heavily regulated and increasing interest rates are considered in every consumer’s loan application via stress testing.”

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