Rate rises a 'golden opportunity' for home loan check, says Pepper Money

Impending interest rate rises provide an opportunity for brokers to perform a home loan check for their customers, says Mario Rehayem (pictured), CEO of Pepper Money.

Rising interest rates will push up the cost of funds, meaning higher repayments for existing borrowers and reduced lending capacity for new borrowers, cooling house price growth.   

Market commentators and economists, such as Westpac Group, are now expecting the official cash rate, currently at a record-low 0.1%, to start rising in June. The big four bank is forecasting rises in June, July, and August, taking the cash rate to 0.75%. 

As banks have stress-tested borrowers at higher rates, and unemployment is at a record-low 4%, borrowers remain in a strong position to meet their repayments.  But households that had taken on high levels of debt and had low levels of savings, were vulnerable to falling cash flow, the Reserve Bank of Australia said in its April Financial Stability Review. Rising inflation requires support of wage increases, making May Wage Price Index data important.

Read more: RBA on what’s posing a risk to borrowers

Pepper Money CEO Mario Rehayem said rate rises were “inevitable”, providing an opportunity for brokers to get in front of their existing customers.

Taking on a customer isn’t “just a transaction”, it’s “a life process”, he said.  This message was at the forefront of Pepper Money’s discussions with brokers.

“It’s about understanding the customer’s ability to repay their loans and, to do this, I encourage brokers to carry out a loan health check with their customers to understand what they’re paying currently, and what they’re estimated to be paying if all the forecasted rate rises were to come into play,” Rehayem said.

A review discussion enables brokers to pre-empt the level of extra payments customers could expect, giving them time to rein in their discretionary spending if needed, he said.

Knowing they could meet their repayments amid rising mortgage rates would give borrowers a level of comfort.  Pre-warning customers and giving them a heads-up rather than waiting for them to get into a stress environment, allows brokers to build a “relationship for life”.

“Amid a backdrop of rising rates and other household expenses going up, I think it’s a golden opportunity to reconnect with customers. It’s a golden opportunity to be at the forefront and inform customers ‘this is what you should be expecting’, and then give them ample time to readjust their discretionary spend or help them identify alternative options to suit their changed circumstances,” Rehayem said.

Performing an annual review, otherwise known as a ‘health check’ was also an opportunity for brokers to share their specialist and industry knowledge, which isn’t covered in mainstream media.

“Information being fed to customers should be always fed in conjunction with what the market is doing and always give a proactive understanding of some of the inside information that they receive through trade presses and other sources,” Rehayem said.

“Most customers only know what’s been told or what’s been presented by the news or radio, so it’s always good to be part of their education journey – especially when it comes to mortgages and asset finance.”

As brokers perform Best Interest Duty and work with customers before an application is approved, they typically have less visibility of the borrower’s financial situation post-settlement. Since the last interaction, customers may have taken on a credit card or personal loan, which, along with rising mortgage payments, puts them at greater financial risk.

“That health check and that proactive phone call will give the broker a better appreciation of their customer’s current situation, which will then better inform them to assist their customer in that area,” Rehayem said.

Read more: Pepper money to acquire 65% of Stratton Finance

Turning to the impact of house prices on borrowers, Rehayem acknowledged that the last couple of years showed “exponential growth” - something he said was unlikely to continue over the next couple of years.

For borrowers (including first-home buyers) entering the property market amid rising mortgage interest rates, he said the upshot was they’ll have less money to spend, as “their borrowing capacity may have decreased”.

But Rehayem doesn’t expect house prices to tank, citing the level of supply versus demand and continued house price growth from the existing market despite prolonged border closures affecting migration.

“The one thing I believe Australia has done exceptionally well (especially in NSW) is that the government releases parcels of land at a good rate to make sure that demand is there and supersedes the level of supply,” Rehayem said.

“Once the borders open and we start to get a consistent level of immigration coming through, those migrants will need a home, and this will also influence demand.”

The two obvious considerations: buy or rent, would entice investors to re-enter the market due to higher demand for rentals, he said.

“There’s a constant cycle: rates go up, house prices slightly go down, it becomes more appealing for first-home buyers, borders open because they’ve been closed for so long, so you’re going to get an influx of migrants coming in who need to rent houses, spiking the interest of investors to buy properties to feed rental demand,” he said.

As interest rates rise, this will be reflected in the cost of funds across the industry. Increased repayments will reduce borrowing capacity, bringing the pace of house price growth down.

“While there are concerns that households will struggle to cope with rising interest rates, to put things into perspective, the median Australian borrower was two years’ ahead on their mortgage (according to RBA data), he said.

“The number one variance between us and the likes of the US is during the GFC and other stressful times, Australians aren’t the type of people that just walk away from their homes,” he said.

“They’re much more resilient here and the number one factor that keeps the economy going by way of housing market is that the unemployment rate stays low and if [that] stays low, then people tend to flex their spending so they can manage their home loan. They may lose some equity but it’s not going to stop them from making repayments - and that is very important for our economy.”

Once property prices plateau, he said markets would likely turn again, as was evident in previous property cycles.

According to CoreLogic data, national house price growth peaked in March 2021, posting a monthly gain of 2.8%. This coincided with a peak gain of 3.7% month-on-month in Sydney, and 2.4% in Melbourne.

CoreLogic research director Tim Lawless said housing market conditions across the country had transitioned from a broad-based and syncronised upswing, to one that was “multi-speed” and “showing increasing levels of diversity” between cities and regions.

“For example, while housing values are now trending lower across Sydney and Melbourne, the rate of capital gain in Adelaide and Brisbane is tracking at around 2% month to month, growth momentum is accelerating in Perth and remains relatively insulated to a slowdown across many of the regional areas of Australia,” Lawless said.

Lawless said he supported the consensus that housing values would be moving through a downturn by the end of 2022 – with some diversity.

“We aren’t expecting house prices to decline significantly, with housing demand supported by strong economic conditions and tight labour markets, along with the potential for further stimulus focussed on first home buyers or low-income households,” Lawless said.