The Reserve Bank of Australia (RBA) raised the official cash rate today by 25 basis points to 6.50 per cent.
A surging economy, higher than expected CPI results and the booming private-sector credit markets were all attributed to the rate hike. Inflation for the June quarter jumped by 0.3 percentage points to 2.8 per cent – a figure well above the RBA’s forecast.
Australia’s cash rate had sat at 6.25 per cent since November 2006 – the final of three quarter per cent rate rises last year.
Frank Knez, associate director, product and marketing with Resimac believes that low to mid income earners who were only just managing to meet their mortgage commitments would be hardest hit by the rise.
“Recent wage growth has been strong, but this segment has not necessarily shared in that growth,” Knez told Mortgage Business.
According to Knez, managers and originators need to carefully consider borrowers’ ability to service their loans to safeguard customers from financial hardship in the event of future changes in interest rates.
“Marketing efforts can continue as per current practices as long as there is vigilance in underwriting,” he said.
With serviceability now a growing concern, Knez believes that longer-term repayment products could represent a solution for many home buyers. “For borrowers who may struggle to meet the repayment requirements on traditional mortgages, an alternative is to offer 35 to 40 year mortgages, which can reduce the required monthly repayment”.
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