Brokers prepare clients for rate rises

In its last monetary policy meeting the Reserve Bank lifted the cash rate 50 bps, after a 25-bp raise in May, taking the cash rate to 0.85 per cent, as it tries to put a cap on runaway inflation – expected to hit 7 per cent by December.

With variable interest rates creeping above 3 per cent and fixed rates tipping 5 per cent in some cases, Karina Lagos at Vision Finance Australia said setting clients’ realistic expectations was critical at this time. 

Ms Lagos said clients need to add 2 per cent to their repayment calculations.

“This needs to be the number that you’re looking at before you even make the decision to take out the loan, because this is a 30 year commitment,” she said.

“You must be comfortable that you’re going to have quality of life when interest rates do rise.

“We don’t ever want to get to a point where you’re ringing us up and saying, I’ve got to sell my house. It’s not what we want for you. So let’s be realistic about repayments.”

As many borrowers have been riding on low-interest rates, Ms Lagos said she hadn’t seen a huge uptake on fixed rates.

“In the last six to 12 months of last year, we saw less and less uptake in fixed rates, because I think people just thought that the good times were gonna last forever,” Ms Lagos said.

Meanwhile, Adelaide-based broker Nathan Martin said almost 80 per cent of his clients were already on fixed rate, with many making the switch in recent years.

“I proactively called them to make them aware of what’s happening with interest rates,” he said.

“One client went from 2.89 non variable, and then locked in a fixed rate at 4.4 for four years.”

But if fixing rates isn’t an option, having an offset account as a “buffer” or fixing a portion of the loan was also recommended.

“Having the right structure of the loan is important…I would put in a recommendation to maybe fix some of it,” he said.

“Don’t be scared to have a percentage of the loan fixed for two years as another percentage of the loan fixed for four years or five years – you can always mix it up. So you minimise your risk.”

In addition, knowing what the maximum amount a client can afford has been helpful in understanding a client’s lifestyle and communicating changes with them.

“It just stresses the importance of maintaining relationships with your clients to communicate with them,” Mr Martin said.

Lowering the purchase price

Similarly, Emmanuel Marios at Derwent Finance said after having conversations with customers about how a rise in interest rates could alter lifestyle choices some had changed their purchasing decisions.

Mr Marios said they had created an Excel spreadsheet to demonstrate how a rise in interest rate would impact a borrower’s liveability.

“We’ve created an excel spreadsheet purely for each of our clients and say… What position would you be in if interest rates went up another 2, 3, 4, 5 per cent?” Mr Marios said.

“Actually laying that sheet in front of our customers and explaining and showing the numbers has actually made the customers a lot more comfortable and not as aggressive on the purchase price.”

For example, one customer had realised they may need to lower their purchase bracket from $650,000 to $550,000 – in order to comfortably afford the interest rate rises ahead.

As rate changes are happening more frequently and banks pass on those hikes to customers, Daniel Gold at Long Property said it’s important customers do not overcommit, particularly prior to going to auction.

“We’ve been very careful in using language to the effect of: this loan that you’ve been pre approved for is not necessarily the loan that you will be able to obtain,” Mr Gold said.

“I guess we’ve always said things like that, but we’re reinforcing it a lot more. And really just encouraging our clients to check in with us prior to going to the auction.

“Because the last thing you want is clients to over commit and then being stuck.”

As brokers have been spending more time educating clients on their strategies, Mr Gold said they were looking for new and innovative ways to keep clients up to date with the changing environment.

“I’ve organized an event for some private clients of ours, where the guest speaker is one of the bank’s chief economists who is just providing further education for clients,” Mr Gold said.

“In addition to that, we’ve got some webinars that we’re doing with some other thought leaders, which we’re introducing to all of our clients and that can just help keep them abreast of all these changing issues.”

Even the banks themselves have even been suggesting that borrowers speak to brokers, with the Commonwealth Bank of Australia’s executive general manager of home buying, Dr Michael Baumann, stating earlier this month that the change “highlights the important role lenders and brokers play in supporting customers in the current environment”.

“We also encourage customers to speak with us about how we can support them via our extensive network of lenders and brokers,” he said.

[Related: Broker value amplified in rising rate environment]