Mortgage borrowers escape further interest rate pain

Official rate pause considered positive for brokers, borrowers

Mortgage borrowers escape further interest rate pain

The official cash rate remains unchanged, the Reserve Bank of Australia has announced.

In a widely expected move, the RBA has left the wholesale interest rate unchanged at 4.10%. 

The interest rate on exchange settlement balances has also remained unchanged, remaining at 4%.

The mortgage and finance industry has responded to the third consecutive official cash rate pause, amid expectations that end of the hiking cycle is near, making some potentially difficult conversations with clients easier.

In a Monetary Policy Decision released on Tuesday afternoon, Reserve Bank governor Philip Lowe said that higher interest rates were working to establish a “more sustainable balance” between supply and demand.

Following a peak of 7.8% in the December 2022 quarter, the annual Consumer Price Index reduced to 6% over the June quarter, the latest monthly CPI indicator showing a further drop to 4.9% over the 12 months to July.

The central bank’s watch and wait approach to inflation - and the possibility of further rate hikes - is set to continue, as Lowe acknowledged that inflation had passed its peak and that the CPI indicator for July showed a further decline.  Inflation is “still too high” and “will remain so for some time  yet”, he said.

“While goods price inflation has eased, the prices of many services are rising briskly,” Lowe said.

“Rent inflation is also elevated. The central forecast is for CPI inflation to continue to decline and to be back within the 2–3 per cent target range in late 2025.”

Continuing the theme of previous statements, Lowe did not rule out further interest rate rises to bring inflation back within its target of 2% to 3%.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks,” he said.

The Board “remains resolute” in its determination to return inflation to target and “will do what is necessary to achieve that”, Lowe said.

Pause considered positive for brokers, borrowers

National Mortgage Brokers (nMB) managing director Gerald Foley (pictured above left) said that a third consecutive pause represented “hope” and “relief” to brokers and borrowers.

Given the available data and the wave of borrowers still to move from lower fixed interest rates onto higher variable rates, Foley said that a hold was the only course of action for the RBA this month.

“My view is that we should be at the end of the tightening cycle, and the next move, albeit not likely before the middle of next year, should be down,” Foley said. “For brokers, it will make some potentially very hard conversations just a little easier.”

LMG group executive - residential Andrea McNaughton (pictured above centre) said that while borrowers hadn’t yet seen the light at the end of the tunnel, it is likely to be close.

“There is still going to be a lot of engagement with concerned borrowers, but there's greater clarity in where interest rates are going to land which is very important for [them],” McNaughton said.

A further hold to the official cash rate would give borrowers greater confidence as the country enters into the typically busy spring selling season, she said.

According to a CoreLogic Property Market Indicator Summary on September 4, auction activity across the capital cities was the busiest since before Easter. The number of homes auctioned across the capitals over the week reached 2,291, up 25.7% year-on-year, latest figures showing a combined capital clearance rate of 71.2%.

McNaughton said that the results suggested that borrowers had adjusted to the “new normal” of higher repayments and had reduced spending in other areas, as evidenced by recent national retailer reports.

“Brokers can expect to be very busy – they’re still working with clients coming off fixed rates and there are more buyers coming to market because of increased listings and more choice in real estate,” McNaughton said.

Liberty group manager - residential Caesar Ibrahim (pictured above right) acknowledged that expectations that the official cash rate is at or near the peak signalled that inflationary pressures were easing, restoring balance between supply and demand and a more normalised jobs market.

“We expect this stabilisation will mean greater confidence for consumers where near-term costs are better understood, leading to increased market activity,” Ibrahim said.

Homebuyer enquiries heating up

Once the market broadly feels that the top of the interest rate cycle has been reached, Foley acknowledged that this is likely to be when new borrowers return.  Listing numbers are increasing, and there is evidence of more than the traditional spring season bounce back, he said.

“In every market there will be those who were able to sit back and wait out the past year or so, these borrowers are now emerging,” Foley said. “It’s always a great time to reach out to all your customers, irrespective of the market, and check in.  You just never know what opportunity may present.”

McNaughton said that Ray White, an affiliate of LMG, had reported a 9.4% increase in new listings across Australia in August. Alongside a stabilising official cash rate, buyers appear to be returning to the market, she said.

”An increase in property listings is commonplace leading into spring - but buyers have more confidence this year compared to 2022, when the market was in the midst of successive cash rate rises,” McNaughton said.

Ibrahim said that Liberty had seen pre-approval enquiry levels start to rise as customers explore their borrowing capacity before looking to buy.

“Feedback from our broker partners also indicates more customers are preparing for purchase as interest rates stabilise and housing supply returns,” he said.

Servicing of clients continues for brokers

With an estimated 800,000 fixed rate loans rolling off onto higher rates this year, brokers continue to work with clients as they adjust to a normalised rates environment.

Foley acknowledged that interest rates remained a concern for borrowers, many of whom were still thinking about ‘what’s next’ for their home loan. Brokers have been part of this conversation, and their conversation should include what their client’s new repayment will look like and whether changes to spending are required.

“At a minimum, suggest they prepare a budget based on what they may need to change once the new repayment level hits and be available to assist them in any way,” Foley said.

“Borrowers should be encouraged at every possible opportunity to start to make higher repayments at the level they will likely move to post their current fixed rate.”

McNaughton said that brokers had “done an amazing job” for customers, proven by their strong market share (69.6% of new residential loans settled, according to current MFAA figures). The last few years had been a defining period for brokers, as they have demonstrated their ongoing value, strengthening client relationships, she said.

“This presents a great opportunity to extend the relationship into asset finance and commercial opportunities, diversifying their revenue streams and building smarter businesses in the process,” McNaughton said.

As brokers are the intermediary between borrowers and lenders, Ibrahim said that brokers play an integral role, particularly during transitional periods, where borrowers rely more heavily on their broker to navigate changes.

In the often relentless drive to assist clients, he reminds brokers to consider their own wellbeing.

“Customers benefit most when you operate at your best, delivering the highest level of service and expertise,” Ibrahim said.