Property Pulse: Rates, deposits and housing

Below is a transcript of the Podcast enclosed.

Evan Lucas: Hello and welcome to a new episode of Property Pulse.  This week, we are joined in the mortgage broking world by Ben Magnus, who is from Empower Wealth.  Ben, welcome to the program.

Ben Magnus: Thank you very much for having me, I hope all is well.

EL: It is indeed.  I think, right now, why it’s so important to be speaking to someone like yourself, is we have just gone through the first rate increase that some owners have actually seen in their entire house-buying lifetime, with a 25 basis point increase from the Reserve Bank of Australia.  Have you noticed any changes yet on applications with regards to mortgages or people asking the question about how their rates are going to be over the next couple of years of their lifecycle? 

BM: Yeah, it’s a really good question.  There is certainly conversation happening at the moment, but those rates have only just started to roll through to people’s bottom line this week and probably into next week as the banks take a bit of time to process that.  I’m not too sure that it’s yet the catastrophic challenge that the media would be having us all believe, given which side of the political environment we’re on at the moment with an election, but certainly there is conversation but not too much concern at this stage. 

EL: The next thing that comes with that also is that you look at your variable and your fixed rate mortgages that are out there.  Are you seeing people jump back towards fixed or are they still concentrating on the variable?

BM: It’s interesting, because the fixed rates all jumped over the last few months, some of them up by 100 basis points in those favoured years, the two and three-year fixed.  So, customers’ mindset that they’re looking at locking those rates in to make it easier to manage their cash flow, but locking it in at 100-odd basis points above a variable now is probably not the wisest decision to make because even with a few more rate rises this year, your variable is still going to put you out in front from saving cash.  So, we’re not seeing too much fixed rate conversation at the moment.  We offer it, of course, that’s in our requirements under best interest duty to offer all scenarios to a client.  But at this stage, no, variable is certainly the focus at the moment.

EL: So what you’re saying is probably last August was the time to fix?

BM: Yeah, definitely the back-end of last year, depending which lender, but every day at the moment we’re seeing your favoured fixed rates, two and three years, jumping by anywhere upwards of 100 basis points, so it’s certainly not appetising.

EL: What I think is also lost to this whole conversation is that although rates have just risen for the first time since December 2010, is that if you actually look at rates to historical numbers, they’re still incredibly cheap.  In fact, some banks haven’t moved.  My question, therefore, is now actually still the time to refinance, is now the time to be actually asking that question of your bank or your mortgage broker to look at the refinancing?  Have you noticed a jump in the need for refinancing?

BM: Yeah, it’s a really important question and to look at it from a different aspect, the refinance element would be more so for those clients that haven’t actually reviewed their rates over the last couple of years.  As we know, people tend to sit on their finances or don’t want the hassle of refinancing, so they’re the perfect opportunity now to refinance.  Anything with a three or four in front of it, there is better opportunity out there and we’re seeing a significant increase now.  More importantly, those clients that have done lending in the last one to two years, those rates are exceptionally good. 

You’ll be hard placed to find a better discount, so we’re focusing heavily on our back book of clients with those higher rates that we may not have been able to connect with in the past year or so given the volume that came in through the front door over the pandemic, but we’re focusing heavily on touching base and getting them a better deal, so refinancing is absolutely hot to trot at the moment.

EL: Yeah, and that, I think, is absolutely one of the key take-outs of what’s going on right now, is you certainly should be talking to your mortgage broker or to your bank about refinancing.

BM: Absolutely. 

EL: It also brings onto the next question that I think is the real crux of what we’re probably going to talk about over the next couple of years, is that repayments are now obviously going to go up and therefore, the tightness that comes around your loan valuation ratios.  Have you started to notice if people are building a large deposit or whether or not they’re actually still willing to take on that bigger chunk of debt and also that higher rate with a lower deposit rate, is that also starting to adjust in terms of people’s expectations? 

BM: From my observations across the industry, there’s a little bit of that, but I can only really speak towards the Empower Wealth experience.  Our clients are cash flow and investment savvy clients, so they know how to manage their money appropriately and have buffers in place to cover those unexpected increases in rate or changes in serviceability.  Their carrying high levels of cash for deposits into purchasing new properties, the majority would be investment properties but there is certainly the first home.  At this stage, managing your money will be the best approach to do and partnering with an advisory firm to ensure that you’ve got the right data, the technology to do so is critical, absolutely critical. 

Because right now, it might not be the significant challenge that everyone’s expecting with just a 25 basis point increase, but if it is 100 by the end of the year, you really need to get on top of where you’ve got any haemorrhaging in your expenditure.  The deposit side of things, well there’s a lot of money in the economy at the moment in savings accounts, term deposits, redraw, offset accounts, I think it’s about $250 billion, that’s allowing some of our clients to safely go and bid at an auction or borrow a little more knowing that they’ve got that buffer behind them.  But I haven’t seen too much change so far that causes any concern at the moment.

EL: That sort of covers off on what I was going to ask you next, is the distress word.  You know, we are now talking about what 100 bips would probably mean for the movement in the market, but clearly what you’re saying is so far, distress isn’t there?

BM: No, definitely not.  It happens quite frequently before an election, where the market and the economy, in particular in finance, just pauses a little bit to see what changes on the political landscape because the political parties are throwing a lot of promises, to put it nicely, and generally the uplift will come about a week or so after the outcome of the election, depending on which way it goes.  The distress for clients, we aren’t seeing any.  I had a quick look at our arrears on our current existing book of clients and we’ve only got two clients out of our entire book of 10 years’ worth of clients in arrears, but that was easy enough to connect with the client only observing that it’s a setup issue or a bit of a challenge on their side, so really, no distress yet and I think it’s early days.  It’s worth monitoring, for all brokers to monitor their portfolios, but at the moment not seeing any distress or nerves, it’s just uncertainty which I think is the part that we’ve just got to – time will tell over the next couple of weeks, I think. 

EL: You guys at Empower Wealth are big in the investment mortgage broker market.  That is obviously the other question that comes from this, is the change that is coming with interest rate rises.  Investment loans are obviously the ones that always have a slight premium in the price.  Have you started to see people changing their behaviour away from investment borrowing and moving away from investment properties or is it still holding true?  

BM: At the moment, it’s okay.  There’s a softening of new enquiry into our property wealth planning team and subsequently into the buyers agents team, but I think that’s only temporary.  Looking at it holistically, our existing book which is heavily weighted to investment, well they’re opportunities because those clients can refinance.  Now, depending on what’s on offer in the market is whether it’s in the benefit for them changing lenders.  That is an opportunity for the mortgage broking team and that continues, whether it’s owner occupied or its investment.  So it's just about how you educate yourselves to think differently around new leads. 

I’m not sure at the moment that the softening in enquiry into our property wealth team for investment lending is going to continue, I think there’ll be a shift again after the election as it stabilises.  Right now, there’s just so much hysteria in the market, it’s rates, it’s cost of living, it’s all of this compounding media hysteria without some of the facts that, actually, Australia’s in a really good position.  Clients and customers are managing their money because the buffers, redraw, offset volume and savings accounts shows that.  I’m not sure it’s as catastrophic as the media would like us to… 

EL: On that, picking up on that point, because I agree with you, there’s always been signs that after an election there’s a four to five months of optimism build up, even in bad environments, do you think at the moment also – because the other thing that’s very clear out there is that actual supply of property on the market is falling away quite rapidly.  Do you find that well be quite an interesting challenge going forward, the fact that, again, you’ve talked about price and I think that’s really core to this, is the price because investors will be cashed up, they now have a certainty around who is in power, will actually start going back into the market, showing that because of that low supply, it'll keep demand up and keep price up, is that how you’re seeing things going forward? 

BM: Look, there is definitely a supply issue from the markets that we frequent very often within our buyers agency teams, but we’ve got to go into different markets, different states, because WA is seeing an increase in not only supply on the market for sale, but growth in that market, so we’ve got to think differently about getting into there.  We pivoted and now have a strong presence up in Queensland and we’re seeing some really good success in growth in investment properties up there with a good heavy amount of supply.  Adelaide is another area around diversification when you’re starting to look for assets to purchase. 

So, I think it’s just thinking differently.  I’m not sure that supply issues outside of your big cities, your Melbourne and your Sydney, where okay, those prices are pretty high, they’re coming from off the back of some significant growth, it’s thinking differently about where you can pivot into the markets.  That’s how I think about it.

EL: And that, I think, is what we’ll be watching going forward.  Ben Magnus, thank you so much for your time today.

BM: That’s been great, thank you for having me.

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