The Interest Rate Cuts from the Reserve Bank of Australia have different effects on society. The four major banks have managed to answer these changes implemented basic standard variable mortgage rates one after another.
Many, but not all, would benefit from this interest rate cut
changes. There still some that would not be benefited or feel that these
changes would be a disadvantage on their part. The interest rate cut is a very
important move because as we know, there are so many borrowers in Australia and
most of them are having difficulty when they are already dealing with the
housing repayments. The level of indebtedness in Australia is also increasing
and it also means that the interest rate cut has a stronger impact than it used
to be in previous years.
A brokerage director has expressed his regret for the
widening gap between the funding that would likely be acquired by the borrowers
through a direct application from the bank and those who go through a broker.
Loan Saver’s Adviser, founder, and director, Mr. Colin Kidd,
has stated that he had observed an evident risk concerning the brokers. He
mentioned that brokers are not completing detailed expenditure analysis, and
there is a difference between the way expenses are obtained by brokers and
Mr. Kidd has said that brokers are able to match the
expenditure requirements of the lender but that the risks involved with the
analysis will stay with the broker, he continued.
The Loan Saver Director added that in order to reduce the
compliance risk, the brokers need to obtain valuable information about
expenditure by the use of bank statements than any other requirements if they
will directly apply in the bank. He then added that a signed budget is not
acceptable as an expenditure analysis.
Upon considering the recent dealings with lenders,
the Loan Saver Director said that there are cases where he
had included a significant singular expense in the required analysis. He had explained
in the notes that it is a singular expense linked to a new business to be
launch. However, the lender has indicated that the new small-business owner’s
expenditure was too big to pass its serviceability assessment. This happened
despite a clean credit record of the customer.
Lenders now need to follow the indicated expenditure noted
in the statement of position. Thus, notwithstanding the singular expense, they
will use the full amount. Now, if clients will go directly to their lender,
they don’t need to go through with the expenditure analysis, but rather, the
lender will accept the client’s statement of position, and the loan will be
MR. Kidd had noticed that some borrowers have been able to
acquire a loan directly from the bank which they could not do through a broker.
Having a higher chance of obtaining a loan directly from the bank than through
a broker will affect their means of deciding where to apply for finance.
One of the main reason why clients go directly is because of
the long waiting period that if they go directly through a bank, they won’t
wait for too long as they will be getting an approval. Therefore, bank managers
write loans that were declined by the brokers. This is why there is an existing
widening gap between what can be funded through a lender and what can be funded
through a broker.
Moreover, the AFCA (Australian Financial Complaints
Authority) has been assessing historical cases based on the current credit
policy requirements around expenditure. They have been applying retroactively
the current assessment criteria to loans written before the Global financial
crisis, and this is a cause for alarm, especially for the brokers who write
large amounts as they will probably face litigation.
Pepper Money is Australia’s leading non-bank lender, which covers both mortgage brokers and for many non-bank lenders as a financer for wholesale. As a non-bank, they operate a slightly different way as compared to banks and other major financing institutions.
With this regard, Pepper Money just released a new offer for
brokers and their prime and near-prime customers. Australia’s number one
non-bank lender has announced that brokers will be able to offer their
customers discounted interest rates offered in various LVR (Loan-to-Value Ratio)
bands applicable to all of their prime and near-prime products. It shall cover
all full documentation and alternative documentation customers except for
In this manner, brokers can now offer their prime home loan
customers rates from 3.36% per annum, which has a comparison rate of 3.56% per
At the same time, brokers will also be able to access
near-prime rates from 4.26% per annum with a comparison rate of 4.76% per
annum. This limited-time offer is valid until August 30, 2019.
The Director of Sales and Distribution for Pepper Money has
stated that their goal is to help more families and more people to achieve
their dream of homeownership in Australia which we all know that in real life,
the right interest rate can make all the difference.
He also added that they are committed to providing brokers
and their customers with flexible and competitive home loan products to help
them achieve their goals. This is the main purpose of their offering, which is
to deliver real-life solutions for all sorts of real-life situations.
Pepper Money’s decision was in addition to the 0.25
percentage point rate cut declared last month. Their declaration also takes
place following their move to reduce variable interest rate for their existing
customers by 20 basis points, this is in compliance with RBA’s (Reserve Bank of
Australia) cash rate decision.
There have been speculations whether or not the RBA (Reserve Bank of Australia) would cut interest rates once again to boost Christmas sales. The speculations have already been cleared as the RBA has already decided. The RBA Has Announced Their Official Cash Rate In Time For Christmas during its last meeting of the year held on Tuesday (December 2, 2019) to hold official interest rates steady as it waits to see if the economy closes out 2019 on a positive note.
The bank decided to hold the official cash rate at a record
low of 0.75% in line with the financial market and economist expectations.
The market has already expected that the RBA to let its
rates steady with the prediction that the bank would wait to see how the
Christmas and New Year spending activity will affect the economy, before making
another decision early next year. This just explains that there are still open
possibilities for future cuts if the low cost of borrowing and tax cuts fail to
stimulate the economy.
RBA Governor Philip Lowe has stated, “Outlook for the global economy remains reasonable”, adding that “while the risks are still tilted to the
downside, some of these risks have lessened recently”.
“Given these effects
of lower interest rates and the long and variable lags in the transmission of
monetary policy, the board decided to hold the cash rate steady at this meeting
while it continues to monitor developments, including in the labour market, and
is prepared to ease monetary policy further if needed to support sustainable
growth in the economy, full employment and the achievement of the inflation
target over time,”
“The main domestic uncertainty continues to be
the outlook for consumption, with the sustained period of only modest increases
in household disposable income continuing to weigh on consumer spending,”
He also noted that “The
low level of interest rates, recent tax cuts, ongoing spending on
infrastructure, the upswing in housing prices and a brighter outlook for the
resources sector should all support growth.”
Property prices and investors appear to have been the
biggest beneficiaries of the RBA’s 0.25% interest rate reductions in June,
July, and October.
It is a term of an overall economic decline and is usually
followed by an immediate decline in the stock market, an increase in
unemployment, and a drop in the property market. A recession is normally less
serious than depression. It is a decrease in economic activity over a certain
period of time.
The Impact Of
Recession On The Following Economic Factors
Supply And Demand
Though the Central Bank has other means to adjust the interest rate, it still doesn’t have full control of it. The laws of supply and demand are reasonably affected by interest rates. During a period of recession, people will usually choose to save their money because of their lack of confidence.
Most people usually are expecting to lose their jobs so they hesitate to spend or borrow, and instead, they chose to borrow. As a result, there is more supply of money than demand in borrowing. During a period of recession, a paradox of thrift is deemed, it is because the consumers chose to save their money rather than use it for consumption, and this causes the recession to get worse.
It is not a bad thing to save, however, if all people chose
to save, they further limit the decision of consumers to spend, thus it makes
the recession more severe.
While there is a decline in the economy, the demand for borrowing is also decreasing. A lack of demand drives interest rates to decline. Furthermore, the monetary policy employed by the central bank in times of recession is to increase the supply for money to reduce interest rates. Low-interest rates boost economic activity through consumer spending and investment in business and cheaper financing with low-interest rates.
When there is economic growth, the demand for money
increases, and it influences the interest rate to drive upwards.
On the other hand, the economic downturn affects the
downward impact on interest rates. Therefore, interest rates during a recession
tend to drop, and this is because the inflation rate is low, and the central
bank would like to deal with and encourage the economy.
Essentially, lower interest rates should help the economy
from recession, as it reduces the cost of borrowing, and it should promote investment
and consumer spending.
During a recession, with unemployment continuously increases, it is expected that most of the people will not be able to afford their mortgages, and therefore we can observe home repossessions. In this situation, an increase in the supply of housing but a decrease in the demand is expected.
The investment will drop as companies minimize on taking risks and uncertainty. Borrowing can also be more difficult at this time banks are short of cash.
It comes, and it goes, that is what recession is all about.
There are periods of recessions that are more severe and last longer than the
others. However, as they say, there is always a rainbow after the rain, and
therefore, a recession always ends. When problems in the economy are solved, it
is always followed by economic growth.