Ep 21. Let’s talk Interest Rates
Interest Rate rises - they’re the hot topic right now. In this episode, Michelle chats with mortgage broker Michael Chiel from Stonehouse Group who breaks down all of the hype.
Here’s what you’ll learn from today’s episode:
Are Interest Rates going to increase?
Is the cheapest rate the best one to go for?
Break fees, what do they mean for you?
What is an assessment rate?
If rates rise, will we be able to pay our mortgages?
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
Michael Chiel - Stonehouse Group
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Michelle May: Hi, and welcome to another episode of the Buy Your Side podcast, the property podcast to help you make smarter buying decisions. My name is Michelle May and I am the principal of Michelle May Buyers Agents here in Sydney, Australia. Now, first off, let me just start by apologising. I am living next to a building site. So, if you are hearing some noises in the background, that is my very obnoxious builder next door. But today I have back by popular demand Michael Chiel Stonehouse Group brokers. How are you, Michael?
Michael Chiel: I'm good, Michelle, thank you so much for having me again.
Michelle May: Yes, no, it's fantastic because you provide so much clarity from your end of the property transaction.
And I wanted to talk to you about the burning topic on everyone's lips at the moment, interest rates. Everyone's talking about the banks, the media, the interest rates are going to go up. When are they going to go up? What's that going to do to everybody's mortgage? Can we still afford to buy? But the first question I wanted to ask you, understanding interest rates - is the cheapest rate, always the best one to go for.
Michael Chiel: No, I don't think it is.
Michelle May: Oh, there you go! Okay. Next, tell us why
Michael Chiel: For a couple of things. So the first thing is that it's really important to find a product that suits your goals and your needs. And so just because it's the cheapest product doesn't necessarily mean that that's the case. So as an example, fixed rates typically have some restrictions on how many additional repayments you can make over a set period of time.
And based on your situation, you might be wanting to pay down the home loan faster than what the actual repayments require. So if you had a fixed loan, it might actually stop you from making those additional repayments. So having a rate that might actually be a little bit more expensive, but variable might allow you to pay off the loan faster and then therefore you're actually saving a lot of money over the long term. So, counterintuitively, choosing a rate that's more expensive is actually saving you more over the long term,
Michelle May: Because typically with a variable rate, there are no such restrictions on an overpayment, correct?
Michael Chiel: Absolutely. So, you know, you could take out the loan today and pay it off tomorrow and there'd be no penalty, whereas fixed, that's not the case,
Michelle May: But if interest rates are on the rise, is it better to put in a fixed rate, to lock it in?
Michael Chiel: Not necessarily. So it can also be influenced by your ability to make those additional repayments. The other thing as well is, what the plans are with the property.
So you might be looking to sell the property or move to a different lender in a certain period of time. But if the loan is fixed, you might be restricted. From doing so,
Michelle May: Do you have to pay a penalty? Like if it's locked in for five years, I don't know how long they're generally locked in for say it's locked in for five years. If you want to sell after three, do you have to pay a penalty for not finishing it off?
Michael Chiel: Typically yeah. So with fixed loans, there can be break costs. And those break costs can be very expensive. They're not just a slap on the wrist of $50 and you're on your way. We've seen clients enquire about break costs and the break costs - has been sort of $7,000 - $8,000.
Michelle May: Oh, wow. Okay.
Michael Chiel: You know, it does vary. There are quite a few different factors that go into working out what that break costs actually is. So you might get lucky and it might be zero, but it can be very expensive. So that's a reason that you'd also want to be thinking of, am I selecting this rate because it's the cheapest or do my plans actually fit in with that timeline of that, that fixed period?
Michelle May: Yeah. That makes sense. You've got your interest rates. But then I heard something recently, a thing called assessment rates. What, why is that important and why should people know about this?
Michael Chiel: So assessment rates are what the banks look at to see if you can actually afford the mortgage. So even if the actual repayment or the interest rate that you are going to pay is, I'm just going to make this figure up, but let's say it's 3%, the bank wants to make sure that if rates do change during the time that you hold the loan, that you can still afford it. Generally, they will add, call it a 2% buffer on top or potentially more, so every bank is different and this is why potentially your borrow capacity will change across different lenders because some banks might be a lot more harsh to apply that stress test to your situation.
If the banks had their way, I'm sure they would lend everyone everything they could, but it's really the regulators that have come in to say, we want to make sure that if rates do go up and given the loan term that most people apply for is 30 years, chances are that rates will change during that period. So the banks are making sure that if rates were to change, can you still make those repayments?
Michelle May: And basically who decides the minimum, it’s APRA, right?
Michael Chiel: Right. The regulators do.
Michelle May: APRA is the regulator. APRA is the boss of all the banks and the lenders in Australia. Is that right?
Michael Chiel: Exactly. They'll have a general say of what the banks do, but then the banks can interpret that in their own way. So it means that everyone has sort of a different assessment rate or a different stress test that they can apply.
Michelle May: Do they decide the baseline?
Michael Chiel: No. So that's where APRA comes in.
Michelle May: So APRA decides the baseline and then the banks can decide to make that more difficult for clients.
Michael Chiel: Exactly. So some banks might only want to take on a particular type of client. And so one way of doing that is if they increase that stress test. So it means that in order for you to get a loan with that lender, you really need to be able to afford it with them. Yes, and they might reward you by providing a cheaper interest rate as an example.
Michelle May: Assessment rates are done by banks, but I've also heard that when you put in an application for a mortgage or you go to a broker, your broker should look at this as well, right?
Michael Chiel: Absolutely. So, the broker is sort of the first line of defence. They’re the ones who need to understand your circumstances, understand what you're looking to borrow, but also their job is really to understand what the lender's policies are. A good broker shouldn't be just sort of closing their eyes and lobbying an application to the lender and hoping for the best. A good broker is going to understand the lender's policy, how the banks will apply their assessment rates to that particular client scenario. So that when you're applying, there's a very high chance that the application is going to get approved.
Michelle May: So in your spare time, you're not, Netflixing Michael, you are reading bankers’ policies, is that what you're saying?
Michael Chiel: Absolutely.
Michelle May: Because you gotta keep up to date with all these regulations and policies in case they change, which I imagine is quite exciting at the moment because things are in the media all the time. Now that there is so much talk and I mean, we're talking about it so we're adding to this conversation. The property market has been incredibly hot for the last 18 months. It's still hot, clearance rates are still in the high 70%, which means it's still a vendor's market. There's a lot of voices saying that once interest rates increase, they go up, no one's going to be able to pay the mortgage anymore and there's going to be a glut of properties on the market and, et cetera, et cetera. What is actually your take on that from the borrowing side of things, how likely is that Australians are not going to be able to pay their mortgage?
Michael Chiel: I don't think very likely. And for a few reasons. So number one, I read recently, APRA, the regulatory body that we're just talking about. They did a study and they looked into who's ahead of their repayments. And this was not so long ago. So this was only at the end of 2021. And they found that on average, that mortgage holders were 45 months ahead of their repayments.
Michelle May: Wow. Right. That's nearly four years.
Michael Chiel: And it shows that the regulation is working, that the assessment rates are actually doing the right thing, that it shows that people can very much afford it with that buffer in place. So when the repayments are what they actually are currently, people are still able to save.
In that same study they were looking at the offset account balances. So essentially, customers' savings balances were increasing about 10% over that last 12 month period. So people are still able to save and maybe that will reduce slightly if rates do increase, but we need to keep in mind that as with that assessment rate, it is a moving rate, so as rates increase, that assessment rate will always be, call it that 2%, above what those rates are. People taking out a new mortgage as well will be able to afford those also.
Michelle May: And I imagine those saving accounts have been going up because of COVID as well. Covid's obviously been awful for many reasons, but one of the upsides is that people have spent less money, holidays and whatever have added it into their offset account so that's looking healthier than ever before, which is good. Okay so that's really interesting because I don't think that's all of a sudden everyone's going to be throwing their properties on the market either, but it's interesting to hear from your perspective, and 45 months is a significant amount of time to be ahead on your mortgage. So well done Australia. That's very good indeed.
Thank you so much for your insights into interest rates. I find it a very fascinating topic, particularly now of course, and what's going to happen. There’s some very strong opinions out there. So if you found this episode interesting, but it's left you wanting more if you've got questions, do get in touch. hello@buyyourside.com.au but Michael, if they want to get in touch with you at Stonehouse Group, how do they best get in touch?
Michael Chiel: Feel free to give me a call. My number is 0406 607 387. On LinkedIn, or shoot me an email at michaelchiel@stonehousegroup.com.au
Michelle May: Well, thanks again for your time, Michael, it's been wonderful speaking with you, the voice of knowledge and reason. We'd love to have you back in the future. Everybody thank you so much for listening, and until next time.