Household budgets being squeezed
Rising interest rates are squeezing household budgets, placing greater onus on mortgage brokers to work proactively with their clients.
On Tuesday, the Reserve Bank of Australia raised the official cash rate for the first time in over 11 years. Lenders have been quick to respond, passing on the full 0.25% rise to variable home loan interest rates.
Read more: Non-majors raise variable loan rates
In what is a double-whammy for borrowers having to tighten their belts to manage higher repayments, the annual cost of living for households, as measured by the Consumer Price Index, skyrocketed to 5.1% in the March 2022 quarter.
Although borrowers have been stress tested at higher rates, indicating they can manage higher repayments, some have yet to experience an environment of rising interest rates. Others may have taken on additional debt after their home loan settled.
MPA asked three mortgage brokers and business owners to share how they’re managing interest rate increases with their clients, and what brokers need to know amid a higher rate environment.
KRIA Mortgage Managers mortgage and finance broker Rishi Bhatia (pictured above) said his clients had been preparing for impending rate rises over the last six to eight months.
“Most of our customers have enough buffers to deal with rate rises, however we want to arm them with tools to be in control of their outgoings,” Bhatia said. “A rate rise on its own would be easy to digest, however with high inflation and cost of living going up, expenses must be managed on both ends.”
The Melbourne-based KRIA Mortgage Managers worked with clients in three ways to help them stay in control of their money.
The first was to review their mortgage structure and interest rates.
“For customers whose fixed rate loans will switch to variable later this year, we are actively reviewing the impact on their repayments and providing solutions for them by negotiating better rates with lenders. For those who prefer a fixed repayment for budgeting reasons, we are suggesting the best fixed rate solution for their needs,” Bhatia said.
Clients were also reminded to review “set and forget” expenses, and shop around for energy, insurance, and telco deals.
“We will also be reminding them to use the Victorian government $250 voucher to review their energy bills in July 2022,” Bhatia said.
Thirdly clients were reminded to have a rainy-day fund, using apps and tools to set a budget and review spending. It was important for clients to get into the habit of managing their finances, and by doing this, create a “savings bucket,” he said.
Having navigated changes during COVID-19, Bhatia said change management and mental health were likely to be a big focus for the industry over coming months.
“Be empathetic, invest the time to understand the client’s goals and help them with innovation and creative methods,” Bhatia said.
“At the same time look after your own mental health too.”
Runmore Loans business owner Taras Mencinsky (pictured immediately below) said a broker’s role includes educating clients on how lenders use assessment rate buffers to stress-test mortgage repayments upon application.
“We also provide a table showing the expected repayments for clients based on their interest rate at application and with several increments, up to the assessment floor and/or the current rate, plus a buffer (3%),” Mencinsky said.
“We then talk to the clients about using their offset account and/or additional repayment capacity as a hedge while interest rates are lower and subsequently accessing the offset and/or redraw to mitigate the impact of interest rises.”
Using these strategies helped clients to “smooth out” variations and fine tune their household budget, the Sydney broker said.
It’s well-known within the industry that property prices and interest rates move counter-cyclically, Mencinsky said. As interest rates rise, prices fall (and vice-versa). In a stable interest rates environment, house prices generally rise in line with inflation, wage increases and gentrification, he said.
Providing education and insights to clients that assist with their decision-making and enhance their experience was a good “value add”, he said.
“We also stress that research is key when buying a property: buy a property that has good fundamentals (location, quality of construction, aspect, nearby services like shopping, recreation and transport and future improvement capacity) and to trust that over time, their investment will appreciate, while simultaneously they’re paying down debt and building equity,” Mencinsky said.
“Property is a long term hold and should be viewed as an investment for the future and not a ‘day-trading’ commodity.”
Zippy Financial director and principal broker Louisa Sanghera (pictured immediately below), who won Broker of the Year at the 2021 Australian Mortgage Awards, said all borrowers who hadn’t personally experienced rate rises needed extra support – particularly first-home buyers who purchased within the last two years.
“We continue to communicate to avoid any potential defaults due to mismanagement, and assist with strategies to deal with rate rises,” Sanghera said.
“This shows clients we are being proactive and have their backs, which builds trust.”
Read more: RBA on what’s posing a risk to borrowers
FBAA managing director Peter White (pictured immediately below) said as an industry representative, FBAA had spoken to and called upon regulators and politicians to keep pressure on banks to ensure interest rate rises were in line with the increase in costs.
Rising interest rates generally create a lot of activity as borrowers refinance, White said, noting in an October FBAA rental and affordability survey that 75% of respondents believed rising interest rates would put pressure on their financial position.
“Brokers need to reach out to their clients and see how they are travelling with the rate rises (as many more are to come), see how they can help them and act in their best interests,” White said.
If decreased demand (due to interest rate rises) causes property prices to pull back, some clients may find their situation significantly worsen.
“The longer you leave reaching out to your clients, the tougher their situation may become if they need to restructure the debt,” White said.