Issue 09 | Thursday 5 May 2022 | Interest Rates – You’ll want to hear this!
Hi, Andrew Bell here with you. Today I thought it would be really timely with so much talk about interest rate rises to talk firsthand with Lauren Hall of Loan Market, who was named 2019 Female Broker of the Year and 2020 Young Professional of the Year.
Loan Market is now Australia’s second largest home loan originator and provides around $80 billion dollars’ worth of home loans here in Australia every year. They are an affiliate of the Ray White Group, and they are invaluable to us as they do help our clients secure finance that they may not have otherwise, but certainly to be able to get the best finance in the industry. Welcome Lauren.
There’s been a real shift hasn’t there in the approach of real estate buyers from pre-Christmas to now post-Christmas. How have you seen the attitude of buyers change?
Absolutely, the fear of missing out has been replaced by a fear of paying too much. We are also seeing customers priorities shift away from what is my maximum borrowing capacity, to a conversation around what are my repayments and how much can I afford, a change that has largely been driven by the increase in fixed interest rates.
So, Lauren, what about the volume of buyers? Are you seeing as many people applying for loans now as you were before Christmas?
Yes, enquiry is still good. Over 60% of Australians entrust a Broker, acting in their best interests, to help them secure the best deal, and as a business we continue to help a record number of clients each month purchase property.
Is applying for a loan different now? We noticed since the Royal Commission it’s become quite a daunting process.
There have been significant changes in lending requirements over the past few years. Firstly as part of the Royal Commission and also during the COVID pandemic. The RC changes were around responsible lending, and while being more invasive, were designed to ultimately protect the borrower – a number of the restrictions we saw through COVID were driven more from a lender or mortgage insurer risk appetite. In a lot of cases we are starting to see these relax.
How long is it taking to get finance approval these days?
There are a couple of factors that come into play being the level of complexity in the client’s position which will determine what lenders they have access to – and then of course the timeframe for those lenders. Clients who are also organised with all their documentation will achieve an approval quicker. My advice is always to be financially organized before making any offers, you need to have a fully assessed pre approval before going to contract.
Let’s move into a bit of a discussion about interest rates. There’s already been a shift in fixed rates. What were they pre-Christmas and what are they now?
Late 2021 you could secure 1.99% fixed for 4 years @ 95% LVR – as we all know, absolute record lows. We are now seeing the same 4 year fixed rate sitting in the 4% range. Context around this is that these are the rates we were looking at pre covid, and this was cheap money back then, we just need to readjust to not seeing fixed rates starting with a 1 or a 2.
What’s happening with variable interest rates?
Variable rates are still as low as 2% and we haven’t seen an increase in these yet. A number of economists are predicting that these will increase in the near future and everyone is very keenly keeping an eye on the RBA cash rate announcements, so time will tell.
During the period of time when interest rates were dropping people were locking in fixed rates at various stages and there was a greater inclination to get fixed rates. What is the tendency now that interest rates will be rising? Is it better to go for variable or fixed?
Fixed rates offer borrowers stability of repayments and variable is all about flexibility. There is no right or wrong way to go here, it comes down to whether we want stability or flexibility, and what your property goals are in the short and medium term. Understanding these factors will help consumers make an informed decision when it comes to the decision around fixed vs variable.
But of course, you’re not in the position to be able to identify what the Reserve Bank might well do but what are you hearing in the industry at large? Is there an industry belief about how high interest rates may go, and are we talking fixed rates, variable rates or just the official cash rate?
There is definitely a keen interest in watching the cash rate announcements and everyone is speculating. The cash rate is only one factor that comes into play when the banks are deciding on interest rates, and the last 2 years have been a perfect example of interest rate changes happening, up and down, independent of any cash rate announcement. At the end of the day, we knew those low rates weren’t going to be around forever, so if consumers haven’t been looking at their budget and discussing interest rates, then they need to start doing this so they are prepared for any potential increases.
Of course, one of the key pieces of financing is valuations, what are you seeing in this space? Are valuers already factoring in some downward direction on real estate values or are they relying on sales that have occurred in recent times that might reflect the peak of the market? I guess it would be true to say that the valuers are employed by the banks to ensure they don’t over lend.
Valuers are there to protect the bank and also the consumer. They are looking at any future factors that would affect the value of the property. They will make commentary about this on their valuations, and they also use a risk rating scale. We are seeing valuers starting to use more cautionary commentary and an increase in the risk ratings.
Of course, for buyers to be in the best position that they can be to entice the seller to negotiate with them is to be a finance approved, cash, unconditional buyer. How challenging is it to get pre-approval and how long is it taking?
This again is largely determined by how quickly a client can organise their documentation, how many lenders they qualify for and whether those lenders even offer fully assessed preapprovals. Getting fully preapproved is 90% of the work done, so it’s well worth it. I would suggest getting all your documentation organized at least a few weeks before an auction to allow time for a full assessment so you can bid with confidence on the day.
And perhaps my last question for today, Lauren, is there still competition amongst banks? Are there significant differences in the loans you can get?
100% – the banks are very keen to do business. Having access to over 60 lenders means that it is very easy for us to see if the offer is in the market. A number of the banks don’t put their best foot forward, they expect you to negotiate, we know this, we know their target client, and we know how much they will move when pushed.
I have been saying to our clients for a long time now that the bank that you have been with for some time will be the least attractive bank to get a loan from. That when a bank has your business, they do not feel they need to compete to keep it and that you are more than likely to get the best loan by moving to another institution. Would you agree with that, and I found that a lot of people are reluctant to make the move to another bank as they feel that the process would be complicated and time consuming. Is that the case or are you guys able to make it easy for people?
Loan Market are aware that refinancing means paperwork and it’s time consuming and so they have invested hugely in fantastic tech platforms to make it easier to provide the details and documents needed. And then of course, once we have that information from you, then the rest is up to us, we do the shopping across our 60 lenders for you and provide our recommendations based on your best interest.
You can contact Lauren by phone on 0468 990 233 or email email@example.com.
I am a great believer in cycles, and I have been pre-empting since late last year that the property market would be transitioning into the next stage of the market and that that was just going to be a natural occurrence, in fact a very healthy one. Likewise with interest rates we all knew that the emergency stimulation settings that were put in place at the beginning of Covid were only ever going to be short-term.
They always were designed to stimulate the economy and stimulate our markets, and they have done their job. But we can see the dangers over stimulation and that is the rise of inflation and that now needs to be bought under control. This is not peculiar to Australia, it’s happening all over the world, and once we have gone through that period of resetting interest rates to more realistic levels. It will stabilise as will the real estate market as it goes through its transition from boom to price adjustment phase. So, don’t be alarmed, it’s just a normal process in market cycles and when you are aware of these stages you are able to be far more relaxed about what’s happening and to manage those cycles to best suit your own personal circumstances.
Always here to help with any insights that you may be seeking. Look forward to being with you again in a fortnight’s time.
Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group