The Reserve Bank has lifted the target cash rate for the fifth consecutive month in an ongoing battle against surging inflation.
At its meeting on Tuesday, the central bank announced its decision to lift the OCR by 0.5 basis points to 2.35%. Here’s what some brokers have to say about the move.
With the OCR rise highly likely to be passed on in full to household mortgage holders, Peter White, managing director of the Finance Brokers Association of Australia (FBAA), said the latest increase on top of the previous rate rises will hit borrowers hard.
“We have reached a point where more borrowers will find it impossible to refinance and will be trapped in ‘mortgage prison,’” White said.
Mortgage prison, he said, is when borrowers are forced to stay with their current lender at whatever rate they are being charged, because they are unable to secure a new loan due to the rate on which their application is assessed, which, on average, is a couple of percentage points above the actual rate.
“If their property value – and therefore equity – decreases, they can find themselves below the deposit threshold required by a new lender, and this can also make refinancing very difficult,” White said. “You would think that if you can afford to pay the higher repayments with your current lender, that new lenders would take this into consideration, but this is not the case, as assessment criteria can remove the option of refinancing.”
White said there may still be options though, but these depend on the individual circumstances of the borrower.
“My advice would be to see a mortgage broker as soon as possible to discuss your situation,” White said. “Time is running out for many to refinance, so if you think you may not be able to manage higher repayments, the time to act is now. The first step is always to talk to your existing lender and ask what they can do. If they can’t offer you a better rate, then see a broker who has access to many more lenders including second tier and non-bank lenders. Often these second-tier and non-bank lenders can provide a solution that the big banks cannot.”
Julie Toth, PEXA chief economist, believes there will likely be a surge of Australians exploring their refinancing options as they seek out discounts and cheaper options for their home loans.
“Australia is experiencing historically low unemployment and underemployment rates and – for the first time recorded – fewer unemployed people than advertised job vacancies nationally,” Toth said. “For a typical housing mortgage of $500,000, today’s increase of 0.5% will add $2,500 in annual interest payments, or $208 per month. The cumulative increase of 2.25% so far this year will have added $11,250 in annual interest payments, or $937 per month in additional interest payments.”
Even prior to this latest cash rate rise, Toth said, PEXA’s Refinance Index had already hit a record high in the week ending Sept. 4. This was in line with Mortgage Choice data, which showed that demand for refinancing remains high, with 41% of borrowers switching lenders during August.
“A clear correlation is evident between this year’s interest rate rises and mortgage refinancing activity, indicating that households are responding directly and proactively,” she said.
Mortgage Choice CEO Anthony Waldron, too, believes borrowers should seek their broker and reconsider their options.
“The lagged effect of rate rises, large share of variable rate borrowers ahead on repayments, and borrowers on fixed terms yet to expire, means many mortgage holders have not yet felt or are only now beginning to feel the impact of the initial rises,” Waldron said. “Meaning that strong momentum is likely to begin to fade as consumer spending slows once the effect of rate rises is actually felt. When you look at the home loan market right now, there’s a strong case to be made for borrowers to work with their brokers to review their home loans and get a more competitive deal. Many lenders are offering cashbacks to entice borrowers to switch and attractive home loan rates for new customers. It’s worth chatting to your broker about whether there’s a more competitive home loan out there for you.”
HIA Economist Tom Devitt said the nature of the current cycle means the RBA risks pushing the cash rate too high.
““In a typical cycle the lag from an increase in the cash rate to a slowing in home building could be as little as six months, but in this cycle, the lag will be more than 12 months,” Devitt said. “In July, new home sales declined by 13.1% and home lending declined for all market segments – renovators, investors, and owner occupiers, including first-home buyers, The significant pipeline of work still to complete heading into this cycle will ensure building activity and demand for skilled trades remains exceptionally strong through the rest of 2022 and into 2023. However, the rise in the cash rate is compounding the impact of the rapid increase in the cost of building a new home that occurred due to the constraints on global supply chains. The rising cost of construction would, by itself, have slowed building activity. It will not be until mid-2023 that the effects of the first rise in the cash rate adversely impact the volume of work on the ground. Subsequent increases in the cash rate will have exacerbated this slowdown. With long lead times in this current cycle, there is a greater risk that the impact on unemployment of a rapid rise in the cash rate will be obscured and that the RBA will overshoot with unnecessary rate increases.”
