Aggregators agree borrowers can handle rate rises

Following a speech made by the RBA deputy governor this week, two aggregators agree that most borrowers are well-placed to manage interest rate rises.

But as certain borrowers are more exposed to interest rate rises, aggregator outsource Financial said education, and the role of brokers, is now more important than ever. Understanding their options and taking action gives mortgaged households a level of protection from rate rises, Lendi Group said. 

In a speech delivered to the Economic Society of Australia on Tuesday, Bullock considered how households were placed to manage rising interest rates, and the implications for financial stability. In aggregate, indebted households were resilient to at least some rises in interest rates, she said.

Almost three quarters of outstanding debt was held by households in the top 40% of the income distribution, Bullock said. Households in the bottom 20% of the income distribution held less than 5% of the debt.

Read more: Aussies can handle further rate hikes - RBA

Strong house price growth over 2021 and early 2022 boosted asset values, and savings rates had increased during the COVID-19 pandemic, Bullock said. Additionally, record-low interest rates, resulting in reduced interest payments, allowed households to add to their savings. 

Strength of lending standards, including application of serviceability buffers, gave the RBA reason to feel confident that many households were able to absorb some interest rate increases.

High debt-to-income borrowers were more vulnerable to the effect of a loss of real income through higher inflation, particularly if combined with rising interest rates and a fall in house prices, Bullock said. 

Nearly 40% of households were on fixed mortgage rates in early 2022, and the majority were due to roll off within the next two years, with the highest portion of loans due to expire in the second half of 2023, providing insulation from rate rises in the shorter term. 

CEO of outsource Financial Tanya Sale (pictured above) said over the recent period of record-low interest rates, borrowers had accumulated savings of around $260 billion. 

This indicated that a large portion were better able to weather interest rate increases, she said.

“In a lot of cases, this was achieved by not reducing their repayments as rates dropped,” Sale said.

“This now has the added benefit of the rate rises not having as big an impact, as many borrowers were already paying over their minimum required repayment.”

As loans were assessed with a servicing buffer near 3%, interest rate rises had already been factored into borrowing capacity, she said.

But Sale acknowledged that the rising cost of goods and services was likely to eat into household buffers, putting increased pressure on borrowers at a time when interest rates were also rising.

Recent borrowers were likely to feel the pinch of rising interest rates and price increases the most, she said, particularly first home buyers who haven’t yet had to deal with those fluctuations.

First home buyers may be on higher LVRs, meaning they had less flexibility to explore refinance options to reduce their mortgage rates, she said. 

“The other group of borrowers are those that may have experienced hardship and reduced incomes during the pandemic and who have only been finding their feet in the past few months,” said Sale.

Borrowers who locked in fixed rates in early 2022 were able to take advantage of some of the lowest fixed rates in the market.

“The risk for them is that the ‘mortgage shock’ at the end of their fixed rate could be significant: there are forecast examples where a borrower with a loan of around $500,000 could see their repayment go up as much as $1,000 a month when their fixed rate expires,” Sale said.

Read more: outsource Financial’s education series broadens skills

This is an example of where mortgage brokers are able to step in and help to mitigate mortgage stress for their clients, before their existing fixed rate expires, she said.

In the current environment, borrowers were grappling with the rising cost-of-living, together with interest rate rises.  As property prices ease, some may also see the value of their property go backwards.

“Consumers need mortgage brokers now more than ever. At outsource Financial, our mantra is ‘Education is Empowerment’ and a key component of that is educating the consumer,” Sale said.

She said it was important that brokers provide consumers with the required information now, to enable them to make informed choices and put strategies in place to weather the changes to come.

“One of our brokers in Tasmania (Emmanuel Marios of Derwent Finance) has even developed a simple Excel calculator to demonstrate to clients what happens to their discretionary income and living expenses as rates go up, allowing customers to reflect on their purchase price range or other priorities,” Sale said.

“At outsource Financial, we have been ahead of the game, providing our brokers with education on how to talk to clients about interest rates, decode what is being said out there in the market and provide them with the tools and resources to make informed choices.”

As the country experiences a return to normal interest rates, Lendi Group CEO David Hyman (pictured above) said increased rates would be impacting many household budgets.

“While some homeowners have taken early steps to refinance following the RBA’s cash rate increases over the last few months, the majority of Australian mortgage holders remain either loyal to their current lender or passive about the interest increases. It’s important that mortgage holders know their options and take action to help manage increasing costs of living,” Hyman said.

Homeowners who purchased properties before the pandemic were able to benefit from low interest rates, and collectively accrued $260 billion in savings over the last few years, often in redraw and offset facilities, he said.

“These mortgage holders are more resilient to interest rate increases and are now experiencing a return to pre-pandemic rates,” Hyman said.

First-home buyers and others who purchased property in early 2020, at a time of record low interest rates, coinciding with top of the now falling property market, were most vulnerable to rate rises.

“Knowing their options” and “taking action” are key factors in protecting mortgage households from interest rate rises, he said.

“Lendi data shows that lenders penalise existing and apathetic customers with a ‘loyalty tax’. By challenging existing lender loyalty, and subsequently considering an alternative lender, our data shows existing owner occupiers on principal and interest loans who refinance now could save a median of $1,643 annually,” Hyman said. 

From mid-2023, the country will face a “$130 billion fixed rate cliff”, when home loan fixed rates will start to expire and move to a ‘revert rate’, he said. He emphasised the importance that mortgage holders understand the fixed and revert rate terms on their current mortgage and consider steps to protect themselves from significant monthly increases when their fixed rate expires.

“Fixed rates secured over the last few years were at low rates, often below 2%, and a mortgage ‘revert rate’ is typically higher than a lender’s discount variable rate. Homeowners should not underestimate how critical it is to understand their fixed rate expiration date and take early action - at least two months before their fixed term expires - to minimise extra interest payments and manage their risk,” Hyman said.

An increasing number of homeowners were understanding the value of mortgage brokers to secure finance that best suits their needs, evidenced by the increase in broker market share to almost 70% (MFAA, March 2022 quarter), he said.

“Mortgage brokers provide free expertise in the homeowners’ best interest and navigate the lender landscape and refinancing process on the homeowners’ behalf. For example, there are 29 lenders on Lendi Group’s panel, providing more than 2,500 mortgage products. Our approval confidence technology platform helps customers to get the most competitive deal for their personal circumstances and instantly know which home loan products they qualify for without impacting their credit score,” Hyman said.

The official cash rate, currently 1.35%, has increased 125 basis points since May and the RBA Board expects further increases in the cash rate will be required over the months ahead.

Charting the return to the 2-3% inflation target would require a more sustainable balance between demand and supply, RBA governor Philip Lowe said in a speech to the Australian Strategic Business Forum on Wednesday. Higher interest rates would help to achieve this, through moderating growth in aggregate demand.