The Reserve Bank’s decision to leave the cash rate unchanged for the second consecutive month, means the mortgage market has entered a newfound period of stability but also new challenges and opportunities, according to mortgage broker Sakib Manzoor.
Manzoor (pictured above), is the lead broker at Sydney brokerage Loan Base.
For brokers and borrowers alike, the RBA’s interest rate pause on August 1 came as welcome relief after a 400-basis point rate hike in 15 months.
And even if the there is one or two rate rises in coming months, the RBA is forecasted to enter a period of relative stability with a gradual easing of interest rates expected in 2024 and 2025.
However, Manzoor said it was as “important as ever” for brokers to anticipate what the changes would mean for brokers, borrowers, and the mortgage products available.
“Stability in interest rates still brings about changes in market dynamics,” Manzoor said. “As a mortgage broker, it is essential to stay informed about the overall economic and real estate market conditions, even in stable interest rate environments.”
“This knowledge can help you provide valuable insights to clients, assess their individual financial situations, and offer suitable mortgage options tailored to their needs.”
The impact on brokers
The record low interest rates triggered by the pandemic and the subsequent record rise in the months after brought about some unpredictable behaviour across the market.
Now that the extremes have passed, Manzoor said it was time for the industry to recalibrate.
Firstly, according to Manzoor, stability typically leads to a consistent demand for mortgages, which will inevitably create a steady stream of business over time.
“Homebuyers and existing homeowners may continue seeking mortgage services without significant urgency due to interest rate changes. The absence of sudden rate fluctuations allows for more predictable revenue and cash flow projections,” Manzoor said.
However, in a stable interest rate environment, Manzoor said mortgage brokers may experience increased competition among lenders and other brokers.
“Competition can drive brokers to offer more attractive rates, promotions, or improved customer service to differentiate themselves,” Manzoor said. “Without the need to constantly monitor and react to interest rate changes, mortgage brokers can focus more on providing excellent customer service, personalized advice, and streamlining their processes.”
The impact on clients
With hundreds of thousands of borrowers experiencing mortgage stress, homeowners have gone through a lot in recent years.
Monthly home loan repayments have risen dramatically since the first cash rate rise in May 2022. Repayments have increased by an estimated $1,217 per month on a $500,000 loan over 30 years or $2,435 per month on a $1 million loan, according to Canstar.
While it likely won’t rise as fast or as frequently as before, a further 0.25% cash rate rise could add further pressure to already tight budgets.
“Clients with fixed rate mortgages will continue to benefit from consistent mortgage payments throughout their fixed rate term, providing stability in budgeting,” Manzoor said.
“Clients with adjustable rate mortgages or variable rate loans may still be vigilant about future rate movements and may seek guidance from their mortgage brokers on potential refinancing strategies or the impact of future rate changes.”
Manzoor said a stable interest rate environment could also influence clients’ expectations for the future.
“They may be less concerned about immediate rate changes but could still seek insights from their brokers on long-term interest rate trends. A stable interest rate environment generally reflects a stable economy, which can boost consumer confidence and encourage homebuyers to enter the market,” he said.
“Clients may use this period of stability to focus on broader financial planning and wealth-building strategies, taking advantage of predictable mortgage costs, and brokers could help fill this gap.”
The impact on products
In a stable interest rate environment, certain mortgage products may become more favourable than during times of uncertainty.
Manzoor said borrowers might find fixed rate mortgages attractive, especially if the fixed rates are lower than variable rates, as they offer rate certainty and protection against future rate hikes.
“Borrowers who expect interest rates to remain relatively stable in the short term might prefer shorter fixed rate terms for more flexibility and potential opportunities to refinance at lower rates in the future,” Manzoor said.
Equally however, a portion of borrower could still prefer the flexibility of standard variable rate mortgages, particularly with rates expected to ease over the long term.
“If the cash rate has been stable for a while, borrowers who previously opted for fixed rate loans or interest-only loans might start considering refinancing to take advantage of competitive rates on other loan types,” Manzoor said.
“Stable interest rates could also make interest-only loans more appealing to some borrowers, particularly investors. Interest-only loans offer lower initial repayments for a specified period, which can suit those looking to maximise cash flow or invest in other assets.”
Expect the unexpected
While the market may be forecast to taper off into stability, Manzoor said it was important to remember that this was just an “educated guess”.
The state of the mortgage market and the direction of the cash rate are subject to constant changes based on economic conditions, policy decisions, and as the pandemic proved, unforeseen events.
“This is why that as a mortgage broker, it is crucial to stay informed and up-to-date with the latest economic indicators, market trends, and official statements from the Reserve Bank of Australia,” Manzoor said.
“To assess the current state of the market and the outlook for the cash rate, I recommend consulting reliable financial news sources, economic reports, and expert analyses from reputable financial institutions.”
“By continuously educating yourself and keeping abreast of the latest market developments, you can better assist your clients in making well-informed decisions regarding their mortgages and financial goals no matter the environment.”
