WHAT COULD YOU AFFORD TO BORROW AS RATES RISE?

By June 8, 2022 All

Several leading economists are expecting that the Reserve Bank will increase the cash rate nearly every month between now and December 2022. There are further indications that this may well be the case following the Reserve Bank’s announcement to again lift the official cash rate by another 0.50% at their June Board Meeting, on top of the earlier increase of 0.25% in May 2022. The May rate hike was the first cash rate movement since November 2020 and the first increase in the cash rate since November 2010. An increase in the cash rate of 0.75% in two months is significant, with all consumer and commercial borrowers to feel the increase in repayments flowing through each month to their accounts.

I asked Al Hattersley, MBC Finance, where the economic attention will focus in the next while and asked him to share his thoughts on the impact of rising interest rates on consumer and commercial finance lending options.

“With the Federal Election done and bringing with it a change of power, attention will now turn to the management of inflation, wages, and interest rates. All three will be important in the consumer and commercial finance lending space, however interest rate rises will no doubt have the most impact in future borrowing needs” Al says.

“If interest rates continue to rise each month the cash rate could increase to 1.75% – 2%. If banks pass this on, which you would expect them to do and quickly, then home loan and business loan rates rise, and the banks assessment rates will also rise which will make access to lending more challenging.”

Al went on to explain how the assessment rate differs from the published interest rate and how this would impact access to loans.

“The existing APRA (Australian Prudential Regulatory Authority) requirement is for all banks, credit unions and other lenders to apply a 3% interest rate buffer when assessing the serviceability of lending – this buffer is referred to as the assessment rate and it is used to test “serviceability” of the loan. Serviceability is the ability to repay existing and future commitments on loans and considers several variables such as household expenditure levels and potential interest rate rises.” he explained.

“For example, while the current interest rate may be 3%, the lender needs to assess the borrower’s ability to service an interest rate of 6%. If, for example on a $400,000 loan at 3% interest, the monthly repayment is roughly $1,690, with the interest rate buffer the repayments could jump to $2,400 per month at 6%, or an increase of $715 per month and factored into the assessment of the loan.”

Al emphasised that “With the Reserve Bank being tipped to raise the cash rate nearly every month between now and December 2022 for a start, and with most lenders expected to pass on this rate rise, this buffer comes into play even more.”

Al’s view is that the times of continual cheap money are on their way out for the time being. He says it is important for borrowers to be prepared to look harder to find the right lender. Matching the borrower’s financial situation and preferences with the lender’s options is important and ultimately results in the best outcome for everyone.

“With rising living costs and possibly stagnant wages, it is important to ensure that borrowers have access to a number of lenders to consider and not just the obvious ones, particularly lenders that have good low rates on offer so you can make the most of a potentially reduced borrowing ability”.

“Finance brokers have access to a range of lenders through accreditation across the market and access to broad collection of products and services beyond the top 4 and main commercial lenders. All finance brokers members of AFCA and are bound by ASICs ‘best interest duty’ which safeguards that information and products offered are from a wide range of lenders which means that borrowers will find a range of lenders who are best suited to their personal financial situation.” Al explained.

Contact; mbco@mbco.com.au or phone (02) 6362 0988

Written by Ned Sweetapple
Ned works with Al Hattersley, MBC Finance at MBC Group Services, Orange