Fun fact: did you know that we’ve had one interest rate rise in 2017?
That might sound like a strange thing to say, given that the Reserve Bank of Australia has left the official cash rate at a record-low 1.50 per cent since August 2016.
However, between 1 January and 1 November, interest rates gradually crept up, ultimately increasing by almost 0.25 percentage points – equivalent to one Reserve Bank rate hike.
The average owner-occupier rate rose by 21 basis points, from 4.44 per cent to 4.65 per cent, according to an analysis of the 4,000-plus home loan products on RateCity.com.au.
Meanwhile, the average investor rate rose by 31 points, from 4.59 per cent to 4.90 per cent.
So if it seems like your buyers have been finding it harder to get finance, you’re right.
More challenges are on the horizon
Looking back on the year to date gives us some clues about what you and your buyers can expect from 2018.
The reason that interest rates have been increasing – particularly for investors and interest-only borrowers – is that regulators are trying to remove risk from the mortgage market. The idea is to deny finance to marginal borrowers, so that when the next recession hits, fewer people will foreclose on their mortgage and there will be less turmoil in the banking system.
This effort to de-risk the market is a work in progress, so interest rates will probably continue to climb in 2018 – even if the cash rate stays at 1.50 per cent (which is possible).
Our regulators haven’t just encouraged banks to lift rates – they’ve also instructed them to tighten serviceability requirements. So it’s become harder to qualify for mortgages, especially for buyers with deposits of less than 20 per cent and high loan-to-income ratios.
Again, it’s possible this trend will continue in 2018, which means that even if your buyers believe they can afford to pay higher interest rates, their bank might say otherwise.
Start preparing now for 2018: What does that mean for you?
Well, the harder it is for buyers to get finance, the more likely deals are to collapse.
As a result, I’d encourage you to make friends with a good mortgage broker in your area.
The moment you suspect that a buyer has, or might soon have, finance problems, they should be referred to the broker. The broker should regard you as a valued referral partner, which means treating your buyers like royalty and attending to them as soon as possible. If they can’t offer you that sort of guarantee, you should take your referral business elsewhere.
It looks like 2018 is going to be a challenging year on the home loan front. So if you want to give yourself the best chance of increasing your GCI next year, make sure you get in front of this mortgage problem.
