Written by Brendan Gilmour
What Have I Learned This Year?
We have seen 5 further interest rate rises by the RBA in 2023 which has seen the cash rate increase from 3.1% to finish the year at 4.35%.
For residential home and investment lending, this has effectively reduced everyone’s borrowing capacity by (approximately) a further 10% bringing the total reduction in the amount Australian’s can borrow – since the start of this rate rise cycle in May 2022 – to between 30-40% (depending upon individual circumstances).
There is a light at the end of the tunnel, however, with most lenders indicating (through their fixed rate offers) that they are expecting rates to flatten out – or even reduce in the coming year or so. In addition, we have begun to see many lenders in Australia relax some of their credit policies that inform their internal decision making. Many of these internal policies are discretionary and vary depending upon the borrowers’ individual circumstances.
Knowing the diverse range of these policies and understanding the nuances of their application is what our finance team specialises in here at Hudson. Whilst it has still been a challenging year for borrowers to refinance or obtain additional funds, our Finance Team has risen to the challenge and regularly find lending solutions for clients that would not have been possible direct to bank.
More recently, we have seen a rise in products put out specifically by banks in response to the tightening lending environment of the past 18 or so months. The 1% assessment buffer for dollar-for-dollar refinances (otherwise assessed with a 3% buffer above ‘actual’ rate). The 40-year interest only investment loan for over 50 yr olds who own their home outright (or close to). The 2% assessment buffer for investment purchases and we are starting to see some movement around property share loans, where friends and family can pool together to purchase a property and still keep their finances separate.
Last Year’s prediction
The delayed impact of the recent rate rises will be felt more fully across society, especially and unfortunately by those who can least afford it. This will be exacerbated as more fixed loans begin to revert to variable rates. My hope and wish is that interest rates will plateau before the cash rate reaches 3.5% (however realistically it will probably be between 3.5 – 4.0%) and that by mid to late 2023 the banks will begin to relax some of the policies that they have recently tightened.
Banks will need to continue to find new ways to retain their customers and attract new ones. Those who haven’t been able to refinance recently will have options again by the end of 2023. As the rise of the predominantly online banks continues to challenge and provide real competition to the traditional model of branches and bank managers, we will see an acceleration in the modernisation of the finance and lending sector.
Led by the younger generation and fuelled by our increasing collective concern for the future of our planet there will be a strong growth in B Corporation certified ethical lenders. More banks will apply for the certification (currently there are 5 in Australia) and the existing B-Corp banks will see their strongest year of growth in new customers.
I was optimistic last year that the cash rate would top out at 4% in 2023 and then continue to rise in 2024. The complex interplay of global economic conditions and high domestic inflation (amongst other factors) pushed us higher at an even faster pace than expected. After a post-Christmas rate rise in February, that caught many of the banks economists by surprise, we ended up with five x 0.25% rate rises throughout 2023 – bringing the final cash rate to 4.35%.
As expected, in the increasing rate environment we saw lenders begin to relax their policies and look to innovate with new products to maintain their market share of borrowers. We have also seen a flurry of technological advances with many lenders undergoing upgrades to their digital portals and loan application processes. We have seen similar upgrades occurring in the centralised finance application system and throughout the CRM’s (customer relationship management software) and cloud-based subscription services available to the financial sector.
B-Corp certified values focussed lenders have seen a marked increase in their customer base as have the other customer owned non-major lenders like Mutual banks and state-based lenders.
Prediction for Next Year
Given the expedited rate rise that we have now seen, I think that we have already returned to a cash rate that, historically speaking, is sustainable over the longer term for our economy. Whilst we may have some minor fluctuations – I could see a further 0.25% rate rise in February on the back high retail spending over the Christmas period but then I would expect that could be countered by a reduction towards the second half of the year. Overall, I expect that rates will plateau in 2024 and sit at either 4.35 – 4.60% at years end.
We should also continue to see a relaxation of further policy restrictions by Australian lenders as well as an increase in the offering of innovative products as the banks continue to find new ways to retain their customers and attract new ones.
Further to last year’s comments, led by the younger generation and fuelled by our increasing collective concern for the future of our planet there will continue to be strong growth in B Corporation certified, ethical values-based lenders. More customers will also continue to choose the customer owned and Mutual banks. There will also be a marked increase in ALL lenders offering ‘green’ products in the residential lending space as well as increased competition for customer’s asset finance as more and more Australians make the move to electric and hybrid vehicles.
Final Word for 2022
The Hudson Finance team has expanded with the addition of two fabulous new staff members this year as we have continued in an exciting growth phase. With so many of our clients having been members of Hudson since 1992, we are now in a stage where half of the loans that we advise on are for the children (and even adult grandchildren) of our original members! We are very proud of the longstanding relationships that we have, and continue, to form with our valued clients and are very appreciative and grateful to you all for your continued support, positive reviews and word of mouth referrals
We look forward to continuing to get the best possible rates and lending solutions for you all in 2024 and beyond. Merry Christmas and Happy New Year!