Experts are divided on the likelihood of an RBA interest rate cut in the next few months, but all agree borrowers are banking on it.
With inflation figures having fallen to the lowest level in almost two years, even the prospect of a cash rate rise in 2024 is up for debate.
Mortgage broker Helen Avis (pictured above left), director of Specialist Mortgage, said her clients would breathe a sigh of relief if there were no further rate hikes over the next 12 months, with many feeling the pinch of the rising cost of living.
“Many buyers are concerned about the prospect of rate increases and their ability to service their mortgage,” Avis said.
“This is particularly evident within the first home buyer market who are often shopping at their maximum borrowing capacity, investors using property as collateral to secure finance, and our overseas clients who are often faced with higher rates than Australian residents.”
High hopes that interest rates won’t rise in first half
Avis said her clients are hopeful rates will remain on hold for the next six months, with most believing they won’t see rate cuts until 2025.
“Nearly all of our clients are choosing variable loans over fixed rates. This is in significate contrast to the height of the pandemic when borrowers were opting for low-rate fixed mortgages.”
Avis said clients’ sentiment towards the property market was still positive, “but they are approaching it with a little more caution”.
She said many clients were factoring in potential rate increases, often looking at property well under their maximum borrowing capacity.
Now is a great time for borrowers to take advantage of the competitive rate market.
“Our brokers are negotiating aggressively with our clients’ existing lenders to get the best variable rates, which is often preferable compared to switching to a new loan provider,” Avis said.
Buyers need to spend within means
aussieproperty.com buyers agent Julie Kelley said rate relief would instil confidence in the property market.
“As we all know taking on too much debt can lead to unnecessary stress; I always advise clients to shop in their comfort zone,” Kelley said.
“In such a competitive market, I understand buyers can feel frustrated by not being able to secure their dream home due to budget constraints, and they may feel pressured by selling agents to quickly submit an offer above their initial budget. But it’s important not to let emotions take over.
“We always advise our buyers that are considering pushing their borrowing limits to first speak with their mortgage broker and factor in all increased costs such as stamp duty, repayments and LMI before submitting an offer on a property”.
Financial comparison site Mozo’s money expert Rachel Wastell (pictured above centre), money expert at financial comparison site Mozo, said mortgage holders would welcome a rate cut, no matter how small.
Mozo analysis shows someone with a $1 million mortgage, following a rate cut to 4.1%, will have an extra $157 a month in their pocket, equating to $1,884 a year based on the variable rate staying the same (see Mozo data below).
“I think borrowers will be cheering when a rate cut comes through,” Wastell said. “After one of the most aggressive rate hiking cycles since the early 1990s news about rates has unfortunately been quite doom and gloom.”
RBA on track to meet inflation goal?
Wastell said a rate cut will likely give borrowers some hope that the RBA is on track to meet their inflation target, and that more rate cuts could be on the horizon.
“In a cost-of-living crisis every cent counts; $100 more a month might not seem like much, but for those mortgage holders who have now resorted to credit cards or buy now pay later services to cover their everyday expenses,” Wastell said.
“That $100 could be the difference between clearing those monthly balances or being in the red.”
Despite what borrowers want, Wastell said a rate cut in the next few months was unlikely, as the unemployment rate was holding steady and inflation in services, particularly insurance, was still high.
“Later in the year, if there are no further rate hikes, and the CPI data for the June quarter shows we’re much closer to the RBA’s target of 2% to 3% we will probably see a rate cut or two, but I think it’s important homeowners don’t count their chickens before they hatch.”
Experts predict February cash rate pause
In this month’s Finder RBA Cash Rate Survey, 19 experts and economists weighed in on future cash rate moves and almost all of the experts, 89%, said the RBA would hold the cash rate at 4.35% in February.
Head of consumer research at Finder Graham Cooke (pictured above right) said many Australians were in urgent need of reprieve following the last rate rise in November.
“Homeowners are still reeling from 13 rate hikes in the last two years,” Cooke said.
“Our data shows a staggering 40% struggled to pay their mortgage in December. Even though inflation is falling, I expect the RBA will hold the cash rate for most, if not all of 2024.”
While one in three Finder panellists predict a cash rate cut by at least August this year, almost half, or 40%, don’t expect the RBA to start cutting rates until December 2024 or later.
The majority of Finder experts, or 71%, said they expected the cost-of-living crisis to ease eventually in 2024.
“While the gauge remains in the extreme range, it’s likely that this will be where the cost-of-living pressure peaks,” Cooke said. “We expect to see some relief on the horizon, and with a little luck the pressure will reduce slowly over many months.”
Specialist Mortgage director Helen Avis settled more than $25 million in loans in July, as returning expats and those looking to move to lifestyle locations underpinned a record quarterly performance for mortgage brokers across the country.
Ms Avis completed 49 settlements collectively worth $25.03 million over the month, with that total eclipsing the next highest Australia-based Specialist Finance Group broker by more than $5 million.
Specialist Mortgage which operates in Sydney, Melbourne and Perth as well as international cities such as Singapore, Hong Kong, New York, Dubai and London aggregates to SFG.
The July total adds to a long list of achievements for Ms Avis, including winning St Georges Bank’s Top Flame Broker award in 2013 and 2014, and being named SFG’s International Broker of the year in 2016, 2017, 2018 and 2019.
Ms Avis said a big proportion of the July loans went to returning expats seeking a home in Australia to ride out the pandemic.
More than 500,000 Australians have returned from international cities since the onset of COVID-19, with that influx a big contributing factor to the meteoric rise in housing values over the past 12 months.
“The market is hugely competitive at the moment, and with the appeal of Australia being a safe haven from COVID-19, I’ve seen high demand for family homes being sought in Queensland and New South Wales,” Ms Avis said.
“Clients are looking at options for where to stay when they make it out of quarantine, and somewhere comfortable that they’ll be in for the future.”
One of those expats was Stewart Duncan, who heralded Ms Avis’ expertise in the complicated process of signing and notarising crucial documents for an offshore client.
“It was all a bit complex for a layman, but Helen navigated everything on my behalf and explained the pros and cons of different scenarios,” Mr Duncan said.
“I felt very comfortable being able to reach out to Helen at any time and get a quick response, especially not being in Australia with time differences and trying to get something in a timely manner.
“Doing business transactions is completely different to finding a house for the family and the support from having someone on the ground was immeasurable.”
Mr Duncan said he was extremely satisfied with the rates and the terms of the loan provided by Ms Avis.
“The process requires somebody familiar with the expatriate financial packages and terms and conditions to be able to explain them to the banks,” he said.
Another happy client was Peter, who recently returned to Australia from Singapore and purchased a family home on Sydney’s Lower North Shore and refinanced an investment property.
“We found dealing with Helen and her team a very positive experience,” Peter said.
“From quickly ascertaining our requirements and forwarding a number of attractive options from several lenders, we were able to work with Helen quickly from pre-approval to settlement.”
The strong monthly performance came in an environment of elevated demand for housing finance, with the value of new settlements in the second quarter of the year up 47.25 per cent compared to the same time in 2020.
Data released by the Mortgage & Finance Association of Australia showed there was more than $77.75 billion in new lending facilitated by brokers in the three months to the end of June, up $24.95 billion on the previous quarter.
The second quarter performance represented the biggest observed result for a June quarter and was $13.65 billion more than the previous record three month period since the MFAA commissioned CoreLogic to provide the data in 2013.
SMATS Group executive chairman Steve Douglas, who heads up the main holding entity of Specialist Mortgage, said 2021 had been one of the busiest he’d been involved in through his 25-plus years in migration and financial services.
“We are seeing more clients refinancing with these unprecedented low interest rates, and migrants wanting to return back to Australia are re-entering the property market to secure a property for their return,” Mr Douglas said.
“Given the relative safety from COVID-19 in Australia is it any wonder those Aussies living abroad are trying to get back?
“We’re not surprised, it’s certainly been keeping us busy.”
Interest rates being pushed up by rampant inflation are forcing mortgagees and prospective buyers to find new ways of servicing debt.
Borrowers are increasingly turning to refinancing and pairing up with friends and family to overcome the weighty burden of rapidly rising interest rates.
NAB research released Friday (27 January) reveals that 40 per cent of young Australians are considering buying a property with someone other than a romantic partner.
Outside of dropping their price range, buying with another person tops the list of compromises Aussies aged 18 to 29 are prepared to make to get into the market.
Almost a third are willing to buy and rent the property out initially, while 20 per cent say they’re up for moving into a share house.
For those already paying off a mortgage, record numbers are refinancing in the quest for a better deal.
Borrowers refinanced a record $19.5 billion of loans in November, the most recent month for which we have data, according to the Reserve Bank of Australia (RBA).
By way of comparison, that was 20.4% higher than the year before and 88.2% higher than two years before.
Helen Avis, Director of Finance, Specialist Mortgage, said the RBA has hinted that at least one more rate rise is coming as it wrestles with inflation that has taken off, recently hitting 7.3 per cent.
“In December, it said it wanted to ‘return inflation to the 2-3% target range over time’ and would ‘do what is necessary to achieve that outcome’, by which it means increasing the official cash rate yet again.”
“So if it’s been a while since you took out your home loan, now would be a good time to think about refinancing,” Ms Avis said.
Borrowers getting creative
NAB Executive (Home Ownership), Andy Kerr, said younger people are getting creative when it comes to making their property dreams come true.
“Younger Australians aren’t letting meeting a partner or getting married later in life hold them back from owning a home now.
“People are definitely looking at their options and casting the net wider when thinking about who they could buy with,” Mr Kerr said.
“Rentvesting – purchasing in one location and then renting in another – is another trend that is creeping up in popularity.
“Interestingly, our data shows that first home buyers aren’t being deterred from entering the property market, despite the market softening overall and rising cost-of-living.
“Buyers are just thinking outside of the box to make it happen.”
The NAB research also found that the most common compromise (41 per cent) buyers of all ages were willing to make was the amount they’re willing to spend.
About one in three said they would trade off the size of the land, garden or outdoor space (31 per cent), while about 28 per cent would give up their preferred location.
One in 10 aren’t willing to budge at all on their wish list.
Mr Kerr said regardless of who you were buying with it’s important that you talk about how you’ll jointly save for a deposit, agree on the property and meet ongoing costs.
“As buying a home is the biggest purchase most of us will make, it’s also worth considering getting a solicitor involved for additional comfort,” he said.
With the mortgage cliff around the halfway point of its gradual transition from low fixed to high variable rate loans, is a looming disaster unfolding or are borrowers proving to be more resilient than expected?
It’s late August and the midway point of what was dubbed the mortgage cliff.
This so-called cliff was named to denote the lemming-like fate that supposedly awaited all who had to move from super low fixed term loans secured from mid-2020 to mid-2022 to loans up to triple that interest rate.
While its progression is far from complete, and much of the impact of this mass switch may still be yet to play out in full, the doomsday scenarios have not eventuated at this stage at least.
There has been a slowdown in economic activity and housing market momentum in response to higher rates across all mortgage holders, while CoreLogic has recorded an unusual increase in new listings over the past few weeks.
But overall, the risk of arrears and default remains contained within Australia’s large mortgage market and a level of resilience demonstrated amid tight labour market conditions.
While homeowners are, in broad statistical terms at least, not selling up en masse, they are taking steps beyond trimming the socialising budget to meet these new, sometimes dramatically higher, repayment levels.
The mortgage cliff was all media hype. – Helen Avis, Director of Finance, Specialist Mortgage
The number of Aussie home loan holders refinancing soared 13.8 per cent in the financial year just completed, while those signing new mortgages fell 20.6 per cent, new research from PEXA shows.
That comes as mortgage holders contend with a transition from interest rates on a loan of around 1.9 to 2.5 per cent leaping to between 6 and 7 per cent.
In terms of what that means to a household’s budget, the repayment on a $750,000 mortgage set at 2 per cent would soar from $3,180 a month to $4,830 a month – an increase of more than 50 per cent overnight, assuming a new rate of 6 per cent.
Yet it seems official data on mortgage stress has not seen a blow out in arrears amid the expiry of low fixed-term loans.
Portion of outstanding loans in arrears
Eliza Owen, Head of Residential Research Australia, said as home values rise, the risk of default also remains low.
“As what is likely to be the last of the RBA’s rate hikes is passed through to households with a mortgage, there may be a mild deterioration in housing market conditions if new listings decisions continue to rise.
“The good news for mortgage holders is that this period of economic slowdown will also take the RBA closer to its long-term inflation target, which could be the impetus for a reduction in the cash rate in the second half of 2024, as predicted by most major banks.”
Whether there is another 0.25 per cent increase in the official cash rate by the RBA is an even money bet. But the governor, Philip Lowe, used the just-released RBA Board Minutes for August to acknowledge the mortgage cliff was a consideration in their decision-making process around interest rates.
“Members noted that banks had continued passing increases in the cash rate through to their customers, and that outstanding mortgage rates and scheduled mortgage payments were set to increase further as a high share of fixed-rate loans roll onto higher rates through the rest of 2023.
“Scheduled mortgage payments as a share of household disposable income increased to 9.4 per cent in the June quarter, around its historical peak.
“Voluntary principal payments into borrowers’ offset and redraw accounts declined in the June quarter (while) net flows into these accounts had declined to be noticeably lower than the pre-pandemic average, consistent with pressures on disposable incomes.”
To be more concise, borrowers are hurting.
Finding more than $1,000 a month for mortgage repayments isn’t easy for everyone.
Climbing or falling from the mortgage cliff?
Industry sources are divided on just how severe the implications of the mortgage cliff’s continued unfolding will become. Some argued it was driven by an excitable media while others declare it’s downward spiral with no imminent escape route.
In the former camp, Helen Avis, Director of Finance at Specialist Mortgage, said “the mortgage cliff was all media hype.”
“I cannot see rates rising too much further, and if that is the case then we should not see much more of an adjustment from where we are at now.
“I am not surprised with the lack of delinquencies, with the still relatively strong property market and borrowers able to handle the increases.
“That said some borrowers have been affected and are struggling but the vast majority seem to be coping.
“I know some first home owners who have rented their property and gone back to live with parents, capitalising on the acutely tight rental market to offset the stress of higher mortgage repayments.”
Joe White, President, Real Estate Institute of Western Australia (REIWA), said we are well into 2023 and we have not seen the apocalypse we were told was coming.
“While there have been constant predictions of a flood of forced sales, REIWA data does not yet show an increase in properties advertised as mortgagee sales or mortgagee in possession.
“There is no denying 12 interest rate increases have had an impact on households, but it is disingenuous to underestimate a homeowner’s capacity and willingness to adjust their spending habits.
“Many homeowners on fixed rate loans have prepared for the dreaded mortgage cliff.
“They have paid extra onto their mortgage to be ahead with their repayments, have created a savings buffer or have refinanced.”
API Magazine’s recently released Property Sentiment Report found that the percentage of respondents defining their situation as being in mortgage or rental stress was easing.
While still disturbingly high at 36 per cent, it was an improvement on the 43 per cent of the previous quarter. Disconcertingly, 79 per cent said their financial stress status had eventuated over the past 12 months.
Mark Bouris, Executive Chairman, Yellow Brick Home Loans, however, was far less optimistic than others, reporting that the consequences of the interest rate hikes won’t be fully laid to bear until Christmas this year, as more and more home loans move from cheap fixed rates to high variable rates.
“Expect families to be forced to sell their homes, many to property investors and foreign buyers, and end up in the already-crowded rental market that is driving up inflation.
“Otherwise, families will be forced to cut back their spending on everything from holidays to food to recreational activities and school fees – the list goes on.
“This will hurt the small businesses that rely on consumer spending to pay their bills, which are also rising.
“It’s a vicious cycle, and there’s no clear way out.”
There has been a sharp spike in landlord exits from the property market across Australia.
Victoria is the worst-hit state, with the latest PropTrack figures revealing 30.1 per cent of sales were properties that had been listed for rent since they were purchased.
That’s up from 24.7 per cent in July 2022, and 16.9 per cent in July 2019, before the pandemic. New South Wales followed at 28 per cent, which like Victoria, was also the state’s highest share of investment home sales since late 2018. Queensland was third with 27.15 per cent of sales in July being rental properties.
Regardless of which side of the fence you sit on in terms of the mortgage cliff’s ultimate impact, the rest of the year promises to offer compelling viewing of the economy, housing market, and the financial viability of renters, home owners and investors alike.
What is a mortgage cliff?
The mortgage cliff refers to the sudden large increase in repayments mortgage holders on fixed rate loans will face when their term ends and their loans revert to variable, and the subsequent effect this will have on the property market.
What has been the impact of the mortgage cliff?
While its progression is far from complete, the doomsday scenarios of the mortgage cliff have not eventuated at this stage at least. There has been a slowdown in economic activity and housing market momentum in response to higher rates across all mortgage holders, while CoreLogic has recorded an unusual increase in new listings.
Will property prices fall because of the mortgage cliff?
Property prices have remained resilient for most of 2023 but buyers and sellers alike are eyeing off a crucial spring selling season. While homeowners are, in broad statistical terms at least, not selling up en masse because of the mortgage cliff, they are taking steps beyond trimming the socialising budget to meet these new, sometimes dramatically higher, repayment levels.
The Reserve Bank Governor Philip Lowe has used his final monthly meeting to leave interest rates on hold for a third successive month.
The RBA Board decided to leave the cash rate target unchanged at 4.10 per cent, pointing to subsiding inflation, broad economic uncertainty and earlier interest rate hikes still working their way through the economy.
The decision to hold came as little surprise, with all but one of 38 panellists from Finder’s RBA Cash Rate Survey believing the RBA would hold the cash rate steady in September.
Mr Lowe’s final Monetary Policy Decision said the Australian economy is experiencing a period of below-trend growth that is expected to continue for a while.
“High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment,” he said.
“Notwithstanding this, conditions in the labour market remain tight, although they have eased a little.
“Given that the economy and employment are forecast to grow below trend, the unemployment rate is expected to rise gradually to around 4.5 per cent late next year.
“Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.”
Unlike previous monthly rates announcements, Mr Lowe on Tuesday (5 September) issued a softer than usual notice that more rate hikes may be necessary to curb inflation.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks,” he said, tempering his usual bullish sentiment with the ‘but’ on this occasion.
Little prospect of a rate cut
The rate hold is relatively good news for borrowers but the prospects of an imminent rate cut remain slim.
Economist Saul Eslake, of Corinna Economic Advisory, said the latest monthly CPI data for July show a further and welcome decline in headline inflation to 4.9 per cent, the lowest since February 2022, but still well above the RBA’s target range of 2 to 3 per cent.
“Underlying inflation also fell, but only to 5.6 per cent, even further above the target range, so there’s no need to tighten policy further but nor any reason to anticipate any reductions in interest rates any time soon,” he said.
Former Labor Government trade minister, Craig Emerson, of Emerson Economics, concurred, saying, “The RBA will consider it too early to ease and will maintain its pause position.”
David Robertson, Chief Economist, Bendigo Bank was less optimistic, saying a rate hike was more likely than a rate in coming months.
“The RBA appears comfortable holding the cash rate at 4.1 per cent ahead of the next quarterly CPI report out on 25 October 25.
“Another hike to 4.35 per cent remains the risk, as core services inflation remains stubbornly high, but not until November at the earliest.”
Many believe the cash rate will hold at 4.1 per cent now until the new year and will start to ease back, back to 3 percentage points range by the end of 2024 according to CBA’s Senior Economist Belinda Allen and Economist Stephen Wu. NAB economists believe there will likely be one more hike this year and Westpac’s Chief Economist Bill Evans believes we won’t see rate cuts till this time next year.
What does the RBA decision mean for property market?
The 29.2 per cent of borrowers deemed to be in mortgage stress remains notably lower than the levels witnessed during the financial turmoil of a decade or more ago when mortgage holders in stress reached a peak of 35.6 per cent in mid-2008.
But more concerning is the surge in the number of mortgage holders considered extremely at risk, which has now climbed to 1,017,000 (20.3 per cent). This figure significantly exceeds the long-term average of 15.4 per cent over the last 15 years and reflects an increase of more than 470,000 mortgage holders compared to a year ago, marking a 7.6 per cent rise.
Helen Avis, Director of Finance at Specialist Mortgage, said borrowers were refinancing in record numbers and increasingly turning towards mortgage brokers in an attempt to alleviate financial pressures.
Ms Avis said she expected the RBA to hold off on any further moves for several months as the current raft of increases gradually take effect.
“The majority of home price falls recorded last year have been reversed in 2023, with August marking the eight consecutive month of national home price growth. Strong demand and limited supply have offset the impact of rate rises that continued this year.
Eleanor Creagh, PropTrack Senior Economist, said subsiding momentum in inflation and consumer spending have eased pressure on the RBA to continue lifting interest rates as it tries to avoid a recession while taming inflation.
“The decision by the Reserve Bank to continue holding the cash rate steady in September is likely to maintain both buyer and seller confidence as the spring selling season begins, with home prices likely to continue lifting in the period ahead.
“The majority of home price falls recorded last year have been reversed in 2023, with August marking the eight consecutive month of national home price growth.
“Strong demand and limited supply have offset the impact of rate rises that continued this year.”
Rich Harvey, CEO, Propertybuyer, said as overstretched investors sell it could be a good time to enter the property market.
“Inflation is decreasing slowly as households are finally feeling the real pinch of significantly higher mortgage repayments, so there’s likely to be many discussions around the dinner table as to how households will adjust spending patterns to cope with higher rates.
“Discretionary spending is down and likely to stay low for next six months, and likely to see some investors offload investment properties if the drag on their budget is too strong.
“All this provides good buying opportunities for savvy buyers with financial means to secure more property,” Mr Harvey said.