Unless you’ve avoided all forms of news for the last six months, you’ll be aware that the Reserve Bank of Australia (RBA) has recently slashed cash rates to an unprecedented low of 1%. July 2019 was the second month in a row that rates were cut by 0.25%. It’s the first time since 2012 that the RBA has introduced multiple cuts in consecutive months, and the industry is in a bit of a spin because of it.
In this article, we’ll outline why it’s been done, what the effects are likely to be, and what it means for professionals in the mortgage broking industry specifically.
Why it’s happened
Put simply, Australia’s economy has been chugging along fairly slowly for the past year, and the RBA is concerned about the risk of deflation. This is due to a range of national and international social, environmental and political reasons.
A slow economy can result in things like increased unemployment, a drop in wages and a rise in debt. A lower cash rate allows lenders to pass on lower rates to consumers, which will eventually result in more investment back into the Australian economy. Decreased cash rates are intended to make it easier for people to spend money.
Cash rate cuts particularly impact people that have a mortgage, putting more money back into their pockets at the end of the day so they can pay off their mortgage sooner. As you can expect, this is good news for mortgage brokers seeking new business and return business from people looking to refinance in the new environment.
Why it affects mortgages
The flow-on effects of these rate cuts mean significant savings for variable-rate borrowers. It could save people up to thousands of dollars each year on their repayments.
Take, for example, a family with a $400,000 home loan for 30 years. With a drop in their variable home loan rate, they could avoid paying an extra $2,000 per annum in interest. Obviously, this exact amount varies depending on the rate offered by the lender they’ve taken out a loan with. This is a huge sum of money to save over the life of a home loan.
While the big four banks have led the way by passing on much of the RBA rate cuts to consumers, not all lenders have dropped their rates accordingly. Nick Iliakis of Mozo explained in an article which lenders have passed on the rate cuts, and which have kept most of it to themselves.
What it means for mortgage brokers
With so much shifting in the lending space at the moment, it’s an exciting time for mortgage brokers to be assisting customers. This is an opportunity for you to access great new low rates, and pass on genuine savings. Customers on fixed-rate loans may be prompted to look at refinancing options to get a better deal, while all mortgage holders will be looking around for savings.
Another twist to the current lending environment also came in early July, when the Australian Prudential Regulation Authority (APRA) announced that it would be changing regulations around serviceability assessments. Previously, home loan applications have been assessed using a minimum interest rate of at least 7 per cent, and common practice has been to assess against 7.25 per cent. Under the changes, authorised deposit-taking institutions will be able to set their own minimum interest rate for use in serviceability assessments, using an interest rate buffer of at least 2.5 per cent over the loan’s interest rate.
For borrowers, this could mean a significant shift to a common barrier of entry when it comes to serviceability for home loan. A person taking out a loan with an interest rate of 3.5% would now need to be able to service a loan with a rate of 6% (with the new 2.5% buffer) instead of 7.25% (depending on the individual lender regulations of course), which could mean the difference between being approved or not for the desired loan amount. This presents another huge opportunity for mortgage brokers to assist home buyers who may not have previously serviced.
What you can do about it
Now is the perfect time to consider how you’re finding new clients, and how you can take advantage of the situation to grow your pipeline. It’s also a great time to add value to your existing clients and work on your retention strategy. You can help clients get a better deal on their loan if their bank hasn’t dropped their rate. And if you’re not there to offer a helping hand at this time, there’s a good chance that other mortgage brokers will be contacting them.
For mortgage brokers and loan processors actively looking for work, now is an ideal time to be on the market. An increase in enquiries and loan rewriting is likely to result in businesses needing more staff to meet demand.
If you’re looking for an exciting new opportunity for work in the industry, we can help connect you with the industry’s best brokerages. Alternatively, if you’re a business owner yourself, we’d love to help you find great staff to help you grow and flourish during this time. Reach out to us today for a free, no-obligation consultation.