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The RBA’s decision to hold the cash rate at 3.60% this month after 10 consecutive hikes will allow customers to take stock and also provide a signal that rate increases will not go on forever, according to finance brokers Nathan Massie and Aaron Bell.
The Reserve Bank made the decision in April to pause on increasing interest rates due to signs the headline inflation rate was beginning to decrease, and other factors including ructions in the international banking sector and the observation that previous rate increases were still working themselves through the economy.
Sprint Finance managing director Nathan Massie (pictured above left), who works a lot with investor clients, said the RBA’s decision would help alleviate a pervasive level of uncertainty among finance customers, which was causing borrowers to reach out to look at their loan options much more frequently than in the past.
“There has been a lot of uncertainty among our customers, and we have been having conversations with clients a lot more often,” Massie said. “Typically, it is not clients calling us but us calling them; now, a lot more are reaching out to review their current rates and wanting to look at what other options there are.”
While customers had traditionally been happy with their loan for at least 12 months to two years after being placed with a lender, Massie said this had significantly reduced in the current market, to the point where some customers wanted to review their loans “multiple times a year”.
“The RBA’s decision provides an indication that there won’t be never-ending increases in rates,” he said.
“Many people who purchased their first home in a 2% rate environment are pretty shocked right now – they didn’t forecast these increases would happen. At least this allows people to say, ‘yes rates are higher but it’s not a forever thing, it won’t rise 0.25% every single month every single year’.”
Massie said there was a “recency bias” among customers, because to find the last rate increase before last year they would need to go back to the previous decade. He said the rate pause was an indication to customers there would be a plateau or new normal rate environment coming.
“This decision is providing more certainty to people. The fear that has come about is not so much based on what interest rates are right now, but on not knowing how high they might go. When you pause, you are signalling that at some point in time this is going to stop,” he said.
Massie said he still heard concerns from customers about rates rising to 18% to 20%, which occurred in the 1980s. He said while the borrowers asking these questions were children when rates were that high, they had heard stories from their parents. He said it was indicative of a “fear of the unknown”.
“If we knew rates were going to cap out at 6.5% and it would take 12 months to occur, then we’d be saying, ‘Oh crumbs’, but at least it would be planned. Most people were surprised by these rate rises – brokers were surprised – now people can have more confidence about the impact on their lives.”
Home Loan Village director Aaron Bell (pictured above centre) said that he is glad to see a reprieve for mortgage holders after a “very dramatic increase over the better part of the last year”. “I do hope that this marks the end of the increases and that the RBA is able to return some level of normalcy to the markets,” he said.
While he is waiting to see how the RBA minutes will add to certainty, Bell said because rate increases took time to affect the inflation rate and there wasn’t an instant economic reaction, there could be a period of "testing and adjusting" from the RBA in the months to come.
“I think it's going to be easier for customers to really take stock,” Bell said.
“In an ever-changing environment it very much feels like it's just getting ‘worse’. However once there is more certainty over how ‘bad’ it will become – or where rates will stabilise – I think it's a lot easier to take stock and really understand what the new normal looks like and how to tackle that.”
For that reason, Bell hopes that the run of rate rises may in fact be over rather than paused.
“What I don't want to see is a three or four-month reprieve and then another increase,” Bell said. “I would prefer to see the top of the rate increases remain in place for some time to return a level of confidence and ability for people to know what their repayments will be into the future.”
“The rising rates issue has been hard – thankfully the majority of our clients have been relatively OK, although there are certainly some who are very stretched. The biggest impact really has been budgeting on other items has had to reduce given the current rate of inflation.”
Customers are responding to rate rises by seeking less finance. Equifax data shows mortgage demand dropped by 10% in February compared with the same month last year, while the average equity limit for refinance requests fell 8% over 12 months even while refinance activity increased.
Moses Samaha (pictured above right), executive general manager at Equifax, said the drop in refinancing enquiry amounts suggested that consumers were minimising their debts and borrowing less as interest rates reach a peak, rather than adding a bit extra to their mortgage to cover expenses like renovations.
“Our data also shows that younger mortgage holders, aged 31 to 40, are more likely to refinance compared to older mortgage owners,” Samaha said. “Generally speaking, this younger cohort is at a life stage with greater expenses, and their average loan sizes are comparatively larger and more impacted by changes in interest rates.”
Massie said the elephant in the room, as the RBA “applies a handbrake to a moving car” in the form of rate rises, was that, to date, only those on variable rates had been impacted, not those who were on metaphorical “freeway” of lower fixed rates.
Bell said his business had responded to the rate uncertainty this year by reviewing client loans.
“We have reviewed all our clients in the first three months of the year instead of a normal annual review because of just how many clients are already on sub-standard rates. The possibility of clients on higher variable rates than ‘best in market’ is higher now than I have ever seen, and it's due to the general lending market's propensity to ‘rate creep’ more during RBA movements.”
Home Loan Village is also marketing to borrowers with fixed rate loans expiring this year, in the hope that the business can set those customers up for success as early as possible.
“If I can speak with someone now who is running off a fixed rate in six months, then we are able to relatively accurately estimate the likely repayments once the rollover to variable occurs and we can then get those clients budgeting now as if that has already occurred,” Bell said.
Massie said the opportunity during the rising rate environment and market uncertainty had been to provide a lot more education around preparing customers for interest rate rises. This has helped them change the narrative, he said, and assist customers to be proactive about higher repayments.
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