How rate cuts are impacting mortgage repayments

  • By Alan Shields

While the rate cuts by the central bank were intended to simulate the economy, latest research reveals another impact the cuts are having for mortgagees and for RFi Group chief operating officer Alan Shields, cutting the cash rate further is not going to help the country grow to greatness.

For the last 13 years, RFi has been surveying mortgage holders on a quarterly basis to understand their behaviours and attitudes. 

One of the questions we have always asked during this time has been the extent to which consumers think they will struggle to meet their mortgage repayments. 

Over the years we have seen ups and downs, but in the last three years, the data has hardly moved. 

The proportion of borrowers that say they are planning to overpay on their home loan has also barely changed over the last three years.

Every quarter, without fail, approximately 1 in 6 borrowers says they will struggle on at least one occasion. 

During this time the cash rate target has halved, and we haven’t seen a marked difference in the percentage of people that are feeling better about their debt. 

These people certainly aren’t putting their hands in their pockets to buy a new TV at Harvey Norman.

Source: RFi Group

So now we are down to the other five in six borrowers – those that are expecting to easily meet their mortgage repayments in the next 12 months. Surely they have some extra cash they want to outlay at retailers? Nope. 

The proportion of borrowers that say they are planning to overpay on their home loan has also barely changed over the last three years. Every day of the week and twice on Sunday, approximately two thirds of these people are planning to overpay in the next 12 months. 

Source: RFi Group

Ah ha, I hear you say, they can reduce their repayments and still overpay because we have seen such a sharp decline in interest rates. Can’t they? Yes, they can. However, the vast majority won’t and those that do still won’t spend. Here’s why…

We asked consumers in September 2019 what they had done as a result of the reductions in their home loan in June and July (which was approximately 40 basis points, depending on the lender). More than four in five borrowers (82 per cent) said they had not yet or that they had plans to reduce their repayments. 

In total, 8 per cent said they had reduced their repayment somewhat and only 9 per cent said they had reduced their repayment all the way down to the new minimum amount. 

So will these people l go and spend the extra cash and help stimulate the economy? This is unlikely. There is a large skew among those that have reduced their repayments towards the group that I spoke about initially – those that are struggling to meeting their mortgage repayments. These are not the people that will be planning to increase their discretionary spend.

So what is the answer? I am not a politician and I don’t pretend to be an economist, but I do believe that moving the cash rate target is not going to help us grow to greatness. Perhaps it’s time for some government investment in infrastructure Mr. Morrison?

Alan Shields is the chief operating officer at RFi Group. The full report will be included in the December/January edition of AB+F.