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After a respite of just 19 months Australia has again entered an upward rate cycle, with successive rate rises likely over the coming months.
While the Reserve Bank of Australia’s (RBA) decision to make an early move on rates in October – rather than November – came as a surprise to some, an end of year rate rise was always on the cards.
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But unlike the last cycle, this time around borrowers are rapidly going to find themselves under pressure to meet their financial commitments.
Back in May 2002 it took four and a half years for rates to rise by two per cent. In contrast, some observers are predicting it could take as little as 18 months this time around.
Liquidity also remains a problem, with the continued fall-out from the global financial crisis (GFC) still hitting banks and non-banks hard.
Both are still faced with a horrible shortage of funding and there is the very real prospect that funding costs will continue to rise above and beyond the movement of the cash rate. What could compound the sharper rises of this cycle is the real threat that the cost of funding may force banks to move outside the RBA and pass on higher funding costs to borrowers.
The severity of the funding crisis is underlined by ongoing changes to lender products and policies.
Only last month Westpac, RAMS and St George tightened their lending policies for self-employed borrowers while earlier this month Bankwest was forced to withdraw its highly successful Rate Tracker loan.
But although funding costs are unlikely to return to pre-GFC levels, in time they will improve. The question is when.
As property market activity begins to gather momentum it will be interesting to see what impact the tighter credit environment has on the next phase of the market cycle.
Exactly where the cash rate and lenders’ variable rates end up in the next year is not something brokers can control. What they can control however is the value proposition they offer their clients.
Borrowers who are in the process of buying or who have bought at the bottom of this rate cycle and haven’t locked in rates will see their repayments spiral over the next two or three years.
There is a significant opportunity in the coming rate cycle for brokers to build strong and lasting relationships with their clients by helping them proactively manage their overall financial situation.
Proactive brokers have a real chance in this market to earn trusted adviser status with their clients, rather than be seen as mere product vendors. By being able to deliver holistic financial solutions, brokers have the greatest potential over the longer term to not only boost their bottom lines but shore up their value proposition to clients. And that’s something worth investing in.
Alex Whitlock
Publisher, Mortgage Business
