In an unsurprising move, the Reserve Bank has lifted the official cash rate for the eighth consecutive month.
At its December 6 meeting, the RBA Board decided to increase the official cash rate by 25 basis points from 2.85% to 3.10% and the interest rate on exchange settlement balances to 3.00%, in its ongoing fight against inflation.
The RBA has consistently pushed up the OCR from a record low 0.10% in April to now sit at 3.10%. This now brings the cash rate to its highest point in 10 years.
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Nick Atanasovski (pictured above left), Young Gun of the Year at the 2022 Australian Mortgage Awards and a broker at Cronulla-based Turnkey Finance said brokers need to continue having discussions with their clients on how they could prepare themselves for consecutive rate increases.
“The basic points we discuss with our clients are ensuring they are reviewing monthly expenses to see if they are paying for something that is not required or used anymore such as subscriptions and suggesting making additional repayments to their home loan which provides a buffer,” Atanasovski said.
“By showing our clients through an online calculator what a difference making small additional repayments can do to the loan term over the life of the loan can be very beneficial.”
Atanasovski said Turney Finance calculated how a rate increase would impact a client’s home loan repayment and compared variable and fixed loan options.
“Looking at moving to a fixed rate mortgage gives a client certainty for a period of time. Also negotiate a competitive rate with the borrower’s current lender, which allows us as their broker to shop around for a better home loan deal.”
Atanasovski said another consecutive rate hike meant a lot of mortgage holders were starting to feel the pinch with their repayments and were turning to mortgage brokers to assist them to secure a better deal.
“This has been increasing over the year and is evident that over 70% of borrowers are now using a mortgage broker,” he said.
“Another rate hike will impact the mortgage holder’s budget. The latest increase of 25 basis points will amount to an additional $75 a month on a mortgage of $500,000. Over the course of the year, the cumulative increases amount to an additional $840 per month on a mortgage of $500,000.”
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Atanasovski said mortgage holders could prepare for future OCR rises by reviewing their current interest rates as there might be better options available to them.
“They can also consider moving to a fixed rate mortgage that will give them certainty with the repayments for the duration of the fixed period,” he said.
“I’m expecting to see the rate rises continue in early to mid-2023.”
This is the final RBA Board meeting for the year. The next time the board meets to decide on the official cash rate will be February 7, 2023.
Following Tuesday’s December board meeting, RBA governor Philip Lowe said a further increase in inflation was expected over the months ahead, with inflation forecasted to peak at around 8% over the year to the December quarter.
“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand,” Lowe said. “Medium-term inflation expectations remain well anchored and it is important that this remains the case. The bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3% over 2024.”
Zest Mortgage Solutions is a brokerage based in Brisbane. Director Melissa Wright (pictured above right), said it was extremely important for brokers to have detailed discussions with clients not only about interest rates, but also their cash flow.
“Cash flow ensures that proposed lending structures are comfortably fitting within a client’s financial position,” Wright said.
“Over and above this, we should be discussing what impacts of potential future rate changes have to those cashflow positions. I feel that ensuring we are still having detailed conversations with clients around fixed rates is still important, as they do still have their place for some clients even though they are predominantly higher than the current variable rate options.”
Wright said for the mortgage industry, another consecutive OCR hike meant there were even more opportunities for brokers to be speaking with not only existing clients but also potential refinance clients.
“The latest OCR rise means further challenges in achieving a positive servicing position in application assessments, especially where clients own multiple properties,” she said.
“It has never been more important as a broker to ensure that we are up to date with policy as I am finding that more and more lender recommendations are being based upon policy vs rate.”
Wright said as a borrower, there had never been a better time to work with a mortgage broker.
“Currently, we provide clients with two repayments when we are presenting lending recommendations. The first based upon current interest rates and the second based upon 1% higher, ensuring that the client feels very comfortable with the repayments in both scenarios,” she said.
“Having a budget is also very important, because if a client has a strong understanding of their discretionary cashflow, they can feel more prepared for future potential rate rises. I do feel that we will have another rate rise in the first quarter of 2023.”
