What should customers be asking their mortgage brokers?

Current property market conditions – the likes of which Australia has not experienced in over a decade – are changing many potential homebuyers’ attitudes.

Consecutive interest rate hikes, falling home prices, and shrinking borrowing power have all replaced property buyers’ fear of missing out on soaring equity growth with the fear of running into a mortgage cliff as they come off fix interest rates around the 2% and face rates of around 6%.

As Home Loan Experts senior mortgage broker Jonathan Preston (pictured above left) put it: “Fear is a more powerful emotion than greed, and fear is the mood of the market right now, whereas greed was the driver in 2020 and 2021.”

Preston was talking about first home buyer interest, which had peaked during the pandemic. In the second half of 2020, the Real Estate Institute of Australia recorded the largest yearly increase in first home buyers since 2009.

He said homebuyers are now more preoccupied with the fear that they could buy property today only to have its value decline and home prices fall while repayments increase, leaving them in a mortgage “trap”.

“When people don’t know what their repayments will be [but] know that if the value of the home falls, their whole deposit may be wiped out, they get scared and lean towards inaction,” Preston said.

With these concerns slowly enveloping the Australian property market, MPA put together three key questions buyers ask their mortgage brokers – and potential ways brokers could go about answering these questions and assuring their clients they continued to be in good hands.

MPA asked three expert brokers from Sydney brokerage Home Loan Experts: “What’s the most important question to ask your mortgage broker right now?”

Preston, a senior mortgage broker at Home Loan Experts, said that for him, the question customers should ask their brokers is:

Did this lender increase their interest rates faster than the big four last year?

Preston said that borrowers aligned with non-bank lenders generally had to deal with rates climbing much more quickly than those of bank lenders, simply because non-bank lenders lacked a large depositor base to dip into and had higher costs of funding than the big four banks did.

“So a first home buyer may be wise to stick with (ideally big) bank lenders if they are worried about future rate rises, as the big banks are likely to pass on rates closer to the actual RBA moves, whereas many non-bank lenders are putting up their rates much faster than the RBA because of their funding pressures,” Preston said.

Another Home Loan Experts mortgage broker Jenish Manandhar (pictured above centre) said the number one question customers should pose to their brokers is:

What would be my borrowing capacity if today's rate rose by 1 percentage point?

For Manandhar, it was best for the customer to have a good idea about the potential impact of a rate increase on their borrowing power beforehand, to avoid commitment to a number they would not be able to afford later on.

“Clients should ask how much of an effect a given rate rise will have,” Manandhar said. “This will show them where they stand.”

Home Loan Experts mortgage brokers agreed on this third question that customers should ask their brokers:

What's the best strategy to purchase a property in the current market where rates are high and property prices are falling?

Mortgage broker Romy Dhungana (pictured above right) said that there was no one way to go about answering that question, but brokers could tailor their recommendations based on three factors – the client’s current situation, the client’s near-term goals, and the client’s long term goals.

“One plan [could be] to work out [the client’s] current borrowing capacity and obtain a pre-approval,” Dhungana said. “Some lenders will honour the pre-approval during the validity period, irrespective of rate increases from when the application was lodged, as long as the loan-to-value ratio and loan amount does not increase before formal approval.”

For clients still keen on purchasing property but worried they might fall victim to mortgage traps or home prices dropping, Dhungana said brokers could suggest their clients make offers below market price.

“For example, if you expect the market to fall by 10%, maybe make offers 15% below the asking price,” he said. “This way you're buying at the bottom of the market.”

The Home Loan Experts brokers noted an uptick in people wanting to refinance at the end of their fixed-rate terms and a slump in investors.

Preston explained that those looking to refinance were trying to find the most competitive rate possible, while the drop in property investment was justified by the numbers, which “simply [did] not make sense like they used to” when rental income safely covered for mortgage repayments and holding costs.

“[This] may not be the case forever. And one should note that historically, often the best time to buy is when no one else is.”