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The FBAA is calling on brokers to help clients understand the impact of rate rises after finding that the majority of borrowers don’t feel they could meet repayment increases.
The Finance Brokers Association of Australia (FBAA) is urging finance and mortgage brokers to be “proactive” and help clients understand how they can prepare for future rate rises, after a new survey revealed that the majority of borrowers believe that they would struggle to meet larger repayments.
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According to the survey of 1,004 Australians, conducted by McCrindle researchers on behalf of the FBAA between 20 and 25 August 2021, 75 per cent of respondents said that rising interest rates would put pressure on their financial position.
More than half (57 per cent) of respondents said that – should their monthly rental or mortgage repayments increase by $300 – they would not be able to afford it. Only 9 per cent said they would be “extremely likely” to be able to meet a rise of $300 a month.
The FBAA suggested that an increase of $300 a month was notable, as it equated to a 1 per cent interest rate increase on the average Australian mortgage (of approximately $574,000, as per the latest Lending Indicators report from the Australian Bureau of Statistics, covering September 2021).
Lower-income households, those living in remote areas, and single parents and retirees, were most likely to believe that they lacked the ability to pay $300 more a month.
A similar proportion of borrowers (56 per cent) agreed that should interest rates rise, they would need to look at refinancing their home loans.
Brokers are the solution: Peter White
Given the growing speculation that the Reserve Bank of Australia (RBA) may increase rates next year, the broker association is now cautioning borrowers about being lulled into a false sense of security by the fact that the cash rate has not risen for the past 11 years – and is calling on brokers to help them better prepare for future rate rises.
Mr White explained: “Based on the history of interest rates, we are in a very unique situation of prolonged, very low rates… So, the only way is up.
“The housing market is overheating and the banks, regulators and government are already talking about lifting the floor rate (a higher rate used to calculate repayments) to slow borrowing. This, along with rises in fixed rates, points to rising interest rates.
“Inflation is also going up and tipped to increase further. Rising inflation in New Zealand has just seen a rate rise there, and other nations including the UK and USA have raised rates or are talking about it. Australia is not exempt to international trends.
“Many Australians are clearly on the brink and are sleepwalking into disaster, living in the false hope that rates will stay this low.
“This survey is a wake up call and shows that even a small rise in rates – which is looking more likely next year with rising inflation – could be catastrophic for our nation.”
The FBAA MD added that brokers were “the solution” to helping borrowers prepare.
Mr White said: “The times we are in will change and when rates rise and borrowing slows (and I’ve seen this cycle repeat multiple times over the years), finance and mortgage brokers must be proactive and be the primary source of information and assistance to our clients.
“We are the solution. We can provide our clients with the help they need far more than lenders can. This is what makes us such a vital part of the lending landscape.
“I recommend that brokers start preparing their clients now by informing them of the possibilities and what they need to do in order to be able to handle any future rate rises.
“We can never forget [that] the reason [why] brokers write the majority of mortgages is because of customer service. This survey presents another unique opportunity for us to exceed customer expectations and reinforce our value.”
While the responses from the FBAA survey show a high level of anxiety about meeting larger loan repayments, Luci Ellis, the assistant governor (economic) at the Reserve Bank of Australia (RBA), stated this week that the majority of borrowers do have a cushion available to them.
Ms Ellis commented: “People have been socking away money in offset accounts and redraw accounts during this period... [T]hey’re effectively paying more than they need to, and it’s being paid away against their mortgage and their future servicing needs.
“So, one important context here is, if and when rates do eventually rise, a lot of people will not actually need to raise their actual repayment, because they’re already paying more than they need to, according to their loan contract.”
[Related: Borrower priorities differ to what brokers think they are: Connective research]
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