Economists are expecting an imminent interest rate rise, with reports suggesting it’s coming in June. Regardless of when it happens, home owners may need to pay thousands of dollars more in interest repayments each year, and mortgage brokers will get caught up in the mass exodus of borrowers leaving their bank for more competitive rates. What’s more, a huge number of extremely low one to two-year fixed-rate loans will roll to higher revert variable rates around the same time, compounding this churn.
Brokers who get on the front foot now with their current clients (and this means having high-value conversations about what rising rates will mean, reviewing their current rate, and repricing or refinancing them if it’s in their best interests) will be in the best position to protect their trail book income when rates rise.
Yes, broker workload is already undeniably the busiest it’s ever been. But the 2021 MFAA State of the Industry Report found that trail book drop-off already sits at about 15 per cent per year. When rates rise, drop-off will increase significantly, which will noticeably impact a broker’s income. Brokers need to make time for client retention. It should be a daily activity for all brokers, creating a trifecta of wins for customers, brokers and lenders.
Let’s dig into this a bit deeper. Borrowers have become accustomed to rates going down; the last RBA rate increase was 12 years ago and one to two generations of first home buyers have never experienced an interest rate rise. Checking if their mortgage is competitive hasn’t been top of mind (although cashback offers have driven an increase in home-owner refinancing activity).
But the ACCC home loan price inquiry found that the longer someone is with the same lender, the higher their rate will be, so many home owners are paying much more interest than the market currently requires (the “loyalty tax”), and homeowners are increasingly aware of this.
A record 363,978 properties were refinanced in 2021 according to the latest data from property settlements platform PEXA (an increase of 27.9 per cent from 2020). For other borrowers, the perceived hassle of changing lenders to keep up with the market hasn’t been worth the effort, but after an interest rate rise, that will rapidly change.
According to reports, Westpac is predicting a cash rate of 2 per cent by June 2023. If this eventuates, the average owner-occupier borrower with a $500,000 debt and 25 years remaining on their loan, could see a 22 per cent rise in their monthly repayments by mid-2023.
Brokers need to be aware of how their business could be impacted by this, and proactively combat the risks.
The reality is many borrowers will take their business elsewhere when they realise they’re paying too much interest; whether that’s to another broker or straight to the lender. If their broker hasn’t been prioritising client retention and rate reviews, they may blame them for the “loyalty tax” they’d been paying. If they haven’t heard from them in a few years, it may not even occur to them to reach out for guidance.
Borrowers are also increasingly shopping around and researching for better rates using digital platforms, which are getting much better at converting “shoppers” to customers despite not adding the same value that experienced brokers do.
Brokers can no longer rely on the relationship they had when the loan settled, or on mass marketing emails sent to their clients as open rates decrease in cluttered inboxes. Instead, they need to have regular proactive high-value exchange interactions to stay front of mind and continue to build on the existing trusted relationship.
They need to make time to engage in conversations about a rate rise before it happens. Borrowers who view their broker as a trusted adviser will be more likely to reach out for assistance navigating a dynamic market. Brokers also need to be proactive and not wait until they’re asked to review and reprice or refinance clients.
Technology now exists that lets brokers quickly review, reprice and refinance their clients, which means broker workload is no longer a valid excuse when it comes to client retention activities. Brokers need to start now and capitalise on all the hard work that went into signing that client in the first place. When interest rates rise, they’ll be glad they did.
Adam Grocke is an award-winning mortgage broker, and the founder and CEO of Sherlok, Australia’s first and only automated retention, repricing and home loan refinancing tool.
Frustrated by lenders only offering very low rates to new clients, Adam set about creating a solution to mitigate the time-consuming nature of client retention activities: single-click repricing and refinancing.
He is passionately pro-broker and committed to advocating for a level playing field for brokers and borrowers alike.