Tightened lending is here to stay

Last week, the Reserve Bank of Australia (RBA) made the decision to keep the nation’s official cash rate on hold at 1.5 per cent, however, a shifting regulatory and economic environment could put pressure on the cost and availability of credit.

According to chief executive officer of Mortgage Choice, Susan Mitchell, a combination of economic factors both domestically and abroad may be supporting the RBA’s current stance on monetary policy, which has kept the cash rate on hold since August 2016.

“Domestic conditions remain largely unchanged since the RBA board’s September cash rate decision," Ms Mitchell said.

The latest Westpac Melbourne Institute Index of Consumer Sentiment revealed that the consumer mood deteriorated in August, however, remains in positive territory overall.

Further, National Australia Bank’s Business Survey found that business confidence fell in August and business conditions rebounded from the month prior. The Australian Bureau of Statistics’ Labour Force data revealed that the unemployment rate is 5.3 per cent in August.

“Encouragingly, recent data paints a rosy picture for the state of the Australian economy. Treasurer Josh Frydenberg recently revealed the smallest budget deficit in a decade in the 2017/2018 budget outcome and the June quarter GDP report revealed that the economy grew at the fastest annual rate since September 2012.

“International conditions play a key part in the RBA’s monetary policy decisions. RBA board members would be keeping a watchful eye on the United States Federal Open Market Committee (FOMC) whose board made the decision to raise the benchmark federal funds rate to between 2 and 2.25 per cent in a bid to keep the US economy from overheating. Interestingly, this is the third rate rise from the Fed in 2018 and marks the first time the benchmark has been above 2 per cent since 2008.

“The Fed’s decision to continue to raise rates could have implications on the Australian economy such as export and trade, the value of the Australian dollar and perhaps the most notable from a housing perspective – an increase in wholesale funding costs. Rising wholesale funding costs have already resulted in Australian lenders raising the interest rates charged on their variable home loan products in recent months, and with the market predicting another rate rise from the Fed in December, Australian interest rates could rise further,” said Ms Mitchell.

“The Royal Commission Interim Report released last week provided solid insights into the financial services industry ahead of its final report in February next year. While it may be too soon to speculate on the outcomes of the commission, I believe the new heightened level of scrutiny around lending will remain in place for some time to come.

“These factors combined could put further upwards pressure on home loan interest rates. This, coupled with an increasingly complex loan application process means it has never been more important for prospective buyers and borrowers alike to ensure they are in a financially healthy position and highlights the need for expert advice when applying for a home loan.

“A qualified mortgage broker is across the ever-evolving lending landscape. A broker will assess a potential borrower’s financial situation in order to determine how they can be in the best financial shape prior to submitting a loan application, and if necessary, coach them through any changes they could make in the short and medium term to ensure a seamless application process when they are ready to buy,” Ms Mitchell concluded.