Aggregators and broker react to news
The official cash rate has increased by 25-basis points, taking it to 3.35%, the Reserve Bank of Australia announced on Tuesday afternoon.
In a move expected by big four bank economists, the RBA lifted the cash rate for a ninth time, marking 325-basis points of rises since last May.
The interest rate on exchange settlement balances has increased by 25-basis points, to 3.25%.
Announcing the first monetary policy decision of 2023, RBA governor Philip Lowe said global inflation remained too high, although he also noted that in Australia, where annual inflation reached 7.8% over the December 2022 quarter lower energy prices, the resolution of supply chain issues and monetary policy were having some effect.
“In underlying terms, inflation was 6.9%, which was higher than expected. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy,” Lowe said.
The RBA is forecasting inflation to drop to 4.75% this year, and to around 3% by mid-2025, he said. Wages growth is expected to pick up, the tight labour market and higher inflation providing further momentum for wages to grow.
Recognising that monetary policy operates with a lag, Lowe acknowledged that the cumulative effect of interest rate rises to-date was yet to be felt in mortgage payments. The timing and extent of a slowdown in household spending was currently unclear, he said.
As in the December monetary policy statement, Lowe did not rule out further interest rate rises to bring inflation back within its target of 2% to 3%, saying the path to achieving a soft landing remained “a narrow one”.
MPA spoke to aggregators AFG and COG Aggregation about the impact of the latest rate rise on consumer and business borrowers, and to a mortgage broker about cases where residential borrowers were feeling the pinch.
While the February rise was more of a necessity than a welcome move, AFG CEO David Bailey (pictured above left) said there remained an opportunity for brokers to work with existing and new clients to reduce the impact of rising interest rates.
“30% of customers still deal directly with a lender, so that segment in particular can benefit from the choice and competition brokers provide when they are looking for help to navigate the market and determine their options,” Bailey said.
While there’s typically a lag effect between rate rise announcements and the impact on repayments, Bailey said there was evidence that an increasing number of clients were seeking out brokers to “help them find a better deal”.
“Our December quarter mortgage index showed that refinancing activity, as a percentage of AFG’s total business, is up from 25% this time last year, to 31%,” Bailey said.
While many loans aren’t scheduled to roll over until the second half of this year, he suggests brokers contact these clients early to give them time to adjust to the increase.
“Work closely with your customers now while they are still enjoying the benefit of lower fixed rates to help them prepare,” Bailey said.
Examples of strategies used by brokers to help clients adapt include limiting the use of BNPL facilities, clearing credit cards, having any savings ready to reduce fixed loans when they mature, and/or placing funds into an offset account and starting to identify other options if the current lender is likely to be too expensive, he said.
Looking ahead, Bailey said AFG was excited about the opportunities within open banking, and was working on solutions to help brokers make the most of them, as acceptance and functionality grows.
Additionally, AFG’s partnership with Sherlok continued to help brokers retain their clients, while workflow and process workshops helped brokers use Broker Engine.
Mortgage broker at Nectar Mortgages, Sheryl Ventura (pictured above centre), said her business had started to see refinance enquiries where new clients were effectively “mortgage prisoners”. Ventura described this as a situation where a client’s property value had decreased, leaving them without the option of refinancing (due to high LMI requirements).
The rising rates environment meant there were cases where customers had started to miss credit card repayments, impacting their ability to refinance loans, she said. Exorbitant exit fees were also something to watch out for, as were lenders who were in a position to take advantage of clients unable to refinance, in which case they may be stuck on a higher rate.
“We are starting to see clients whom we cannot assist, who are trapped by their lenders,” Ventura said. “We’re also beginning to see lender retention teams not offer reasonable retention rates and believe this may be because the lenders are banking on the fact that [certain] clients will not be in a position to refinance away (so why give them a discount).”
Ventura said she advised all of her clients to get in touch before they miss a mortgage payment, so they could discuss their options and avoid going into hardship.
“[These include] refinancing their lending out to a new 30-year term, looking at other debt consolidation such as their credit cards, and even a restructure of asset finance, HECS and business loans to ensure they can maintain their mortgage repayments,” Ventura said.
COG Aggregation director Ryan Young (pictured above right) said rate rises were most challenging in the consumer and discretionary asset segment, noting borrowers become more hesitant.
“Commercial finance is more resilient, as there are more situations where businesses need the asset to complete the job, and the additional interest doesn’t break the business case,” Young said.
While challenges from the current interest rate setting outweigh the opportunities, Young said this was also where brokers show their value.
“When a client is committed to buying an asset, a broker’s breadth of products and skill in deal structuring can make a big difference to the client’s repayment,” Young said.
Young said enquiry and volumes from businesses seeking to finance assets such as equipment, vehicles and machinery remained strong, and that customers were relying on brokers to navigate an “expensive and rapidly changing” money market.
While there was more evidence of customers taking longer to make decisions, deferring purchases and comparing prices, the commercial finance area had not seen signs of increased distress, Young said. He noted that some capacity issues were evident in new applications, where stretched borrowers had servicing buffers added to relatively high mortgage payments.
With the February rate rise set to flow through to borrowers once again, Young suggests brokers “look a bit deeper than usual” for the best funding options, using tools such as COG Connect.
“Our brokers don’t need us to tell them this, but in a hardening market, customer service becomes even more critical than in normal conditions,” Young said. “Focus on what you can control: service.”
COG Aggregation, which is owned by COG Financial Services, is investing heavily in technology to help brokers find “all available options for their customers’ scenarios”, Young said.
“With funder rates moving so often, and at different times the best option and the best price in market on a given day can often come from an unexpected place – and our recent updates to COG Connect are a great tool to help our brokers navigate that,” Young said.
Since interest rates started rising off record lows from May this year, borrowers have turned to their brokers to manage the increase in mortgage repayments. Customers with loans rolling off fixed rates in 2023, widely referred to as the ‘fixed rate cliff’ are expected to continue to need help with refinancing as the year progresses.
