• Aron Cardona - Mortgage Broker Northern Beaches

Rates on hold for the 2nd year in a row

The Reserve Bank of Australia (RBA) has held the cash rate at its historic low of 1.5% for the 24th consecutive month. It is the longest period of interest rate stability on record.

The Bank's central forecast for the Australian economy also remains unchanged with GDP growth expected to average a little over 3% in 2018 and 2019.

The news comes as reports claim Australian’s are using their savings to make ends meet and are increasingly facing mortgage stress.

Citing stubbornly low inflation, record high household debt, a slack labour market and, more recently, falling dwelling values, CoreLogic head of research Tim Lawless said, “Despite housing market headwinds from tighter credit conditions, the prospect of mortgage rates remaining reasonably stable should help to keep a floor under housing demand.”

According to its own research, CoreLogic reports that while the cash rate has remained unchanged for two years, the average standard variable mortgage rate has actually reduced by 5 basis points for owner occupiers and increased by 30 basis points for investors.

Further, three year fixed rates for investors have increased by ten basis points and discounted variable rates are up 40 basis points for investment loans. Additional mortgage rate premiums are payable for borrowers who aren’t paying down their principal.

Lawless added, “Clearly the stability in the cash rate hides a deepening complexity in mortgage products brought about by the heightened level of regulation and focus from both lenders and policy makers on improving credit quality.”

The data is backed by further research from Canstar, which calculated that around 170 out-of-cycle rate changes occurred last month.

Canstar group executive of financial services Steve Mickenbecker, said, “The average loan repayment is now around 40% of income. That’s very high and it’s at the point where, were a rate increase to go through, things would become pretty unaffordable. Most people aren’t far enough ahead with their repayments to really absorb a rate increase. An increase would just add to the stress, so this is as good an outcome as the consumer can expect quite frankly.”

However, only last week, RBA governor Philip Lowe warned that “low for long rates” could have negative implications on overall economic and financial stability.

“While a low-for-long scenario presents considerable solvency risk for insurance companies and pension funds and limited risk for banks, a snapback would alter the balance of vulnerabilities," Lowe said.

Looking ahead to the end of the 2018, Mickenbecker added, “Most people have a mortgage that is a couple of years old and they have built up equity and had a chance to get on top of their repayments a little bit. The context is that it is the recent buyers who will be in trouble over this more than anyone else. They bought in the last couple of years when prices were high and they have a large mortgage. Even though rates are low it won’t take much of an increase for them to feel it.”

Advising brokers on how they can help clients who are struggling to make repayments, Mickenbecker continued, “Brokers should be looking out for those special rates, whether they be fixed or honeymoon rates, because they can actually give a very favourable outcome for the customer over the first few years of their loan.

“Obviously introductory rates end and you have to keep an eye on this. However, my advice is you have to take the view that you’re refinancing in a few years’ time and you have to ensure customers are credible for refinance when that time comes,” he added.

According to CoreLogic, financial markets expect that the cash rate will remain unchanged until at least January 2020.

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