Lenders respond to latest increase
The RBA has today lifted the official cash rate by 50-basis points, as it continues to bring monetary conditions back to normal.
It’s the fifth rate hike in a row, marking total rises of 225-basis points since May. The cash rate now sits at 2.35% - the highest level since 2015. The interest rate on exchange settlements has also increased by 50-basis points, to 2.25%.
The central bank’s move demonstrates its continuing battle to put inflation, which reached the annual rate of 6.1% in the June 2022 quarter, back in its box.
Inflation is at the highest level since the early ‘90s and is expected to increase further over the months ahead, RBA deputy governor Philip Lowe said on Tuesday when announcing the RBA board's decision.
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“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,” Lowe said.
The RBA’s central forecast is for inflation to reach 7.75% over 2022, declining to just above 4% in 2023. Deviating from its August statement, when the RBA said it expected inflation to be around 1.75% in each of the following two years, the RBA is now forecasting inflation to be around 3% in 2024.
Lowe said the Australian economy continued to grow solidly, and noted the unemployment rate declined further in July, to 3.4%, the lowest in almost 50 years. The behavior of household spending was a continued source of uncertainty, he said. Consumer confidence had fallen and house prices were declining in most markets, after earlier larger increases.
“Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments,” Lowe said.
The RBA board said it expects to increase interest rates further over the months ahead, but that it is “not on a pre-set path”.
Commenting on the September cash rate rise, Bank Australia relationship manager third party Vincent Lewis (pictured above left), told MPA due to continued interest rate rises alongside other cost-of-living pressures, the bank expects some borrowers would have to reconsider the timing of their next home purchase.
Due to affordability pressures, homeowners may put renovation plans on hold, and first home buyers may find it harder to enter the market, he said.
As lenders pass on the increase to the wholesale cash rate to their variable home loan rates, Lewis expects some customers to seek out lenders offering lowest interest rates, or loans with different features better suited to their needs.
“We are now seeing banks, including Bank Australia, lift their assessment rates to ensure the customer is well positioned to managed increase to their cost-of-living, including future interest rate rises,” Lewis said.
As a responsible lender, Bank Australia applies additional financial buffers within its servicing calculator to ensure customers can manage these costs, he said.
“Our broker partners understand we apply these additional financial precautions and would feel confident, when recommending Bank Australia to their clients, that we have the customer’s best interest at heart and that their loan is truly affordable.”
The bank makes it a priority to ensure its customers are well placed to meet any future financial challenge, Lewis said. From time-to-time, a customer may encounter unexpected circumstances, causing them to need additional financial support from the bank.
“Our strong advice to brokers is to actively encourage customers who may be experiencing financial hardship to immediately contact the bank to seek help,” Lewis said.
A skilled support team is committed to helping customers who may have fallen victim to financial abuse, or who are experiencing hardship, he said.
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As interest rates rise further, ubank chief product officer lending Kanishka Raja (pictured above centre) said he expected more customers to evaluate their current home loan product and rate.
“Any customers experiencing financial difficulty should get in touch early with their home loan provider, who can help them work through their options on a case-by-case basis,” Raja said.
The bank’s BDM and broker support team work with brokers to provide information, workshop ideas and get the best out of products and services available through ubank, he said.
“Brokers in turn use this knowledge to help customers leverage the benefits of our products such as our offset account, and LVR pricing, to help lower costs, based on the customers’ situation,” Raja said.
Firstmac managing director Kim Cannon (pictured above right) told MPA borrowers are unlikely to be surprised by the September cash rate rise, although they may be disappointed.
Currently, there’s little evidence of customers coming under pressure from interest rate rises, he said, noting that the non-bank lender’s arrears have remained at “historic lows”.
“All indications so far are that our borrowers are handling the interest rates increases to date very comfortably, with no signs of stress,” Cannon said.
For customers who encounter hardship over the coming months, Firstmac’s dedicated hardship team is available for brokers and customers to use.
“In the months ahead, some borrowers may feel the rising rates in which case our message for brokers is simple: if you’re contacted by a customer who says they are struggling, encourage them to engage directly with their lender, make full financial disclosures, and use their best endeavours to continue with some kind of contribution,” Cannon said.
Cannon reminded brokers and their customers to contact their lender early in cases of hardship, as this enables hardship arrangements to be put in place.
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“We do encourage borrowers to continue to make a contribution where they reasonably can, in order to minimise the arrears that build up during the hardship period. We find that most will choose to continue making some repayment, for instance by moving to an interest-only payment rather than P&I [principal and interest], and this will leave them with substantially less arrears later on,” Cannon said.
ANZ senior economist Felicity Emmett told MPA after the official cash rate increases and the variable mortgage rate is lifted, lenders give borrowers notice of the increase in repayment.
A borrower’s first repayment at the higher interest rate is usually somewhere between two and three months after the cash rate increase (depending on the lender), she said.
Nearly 40% of households were on fixed mortgage rates in early 2022, RBA deputy governor Michele Bullock said in a speech to the Economic Society of Australia in July.
The majority were due to roll off within the next two years, with the highest portion of loans due to expire in the second half of 2023, she said.
Lenders are expected to announce increases to variable home loan rates over the coming days.