In this week's episode of the Tell Us What You Really Think podcast, Sean and Anthony chat about the recent interest rate rises, and discuss strategies to counteract the increased cost of your home loan.

They also discuss the pros and cons of fixing interest rates in the current financial climate, considering fixed rates have become so expensive.

Hopefully, this episode will provide listeners with some food for thought and possible actions to safeguard their finances against future interest rate hikes.

Sean: (00:00)

Welcome to the podcast, Tell Us What You Really Think. We're Sean and Anthony, and we're here basically just to tell you what we really think. We cover all things property, finance, and technology, and we are brought to you by www.ratetracker.com.au. Anthony, welcome back to Tell Us What You Really Think.

Anthony: (00:20)

Thank you, Sean.

Sean: (00:20)

We're gonna tell a few people what we really think today!

Anthony: (00:23)

Without a doubt.

Sean: (00:24)

So very interesting times, times of uncertainty. We're going to echo the rest of the media here. You're gonna talk about the boom or gloom in our boom or gloom segment, which always kicks off the show. And then we're gonna chat about three different topics. What are we talking about today?

Anthony: (00:42)

Yeah. Three topics are rate rises and what's really happening with the banks, also fixed rates, a hot topic at the moment with clients who are wanting to consider them and where they're at right now.

Sean: (00:55)

Whether it's time to do so or too late, which we've spoken about before.

Anthony: (00:59)

Yeah. And then last one?

Sean: (01:01)

We're also going to talk about small business. We're gonna talk about what we are seeing in our direct line of site, some of the clients we're working with, what some of those small businesses are struggling with, and some industries to watch as well. Hopefully we can share a few tips on how they can prepare now for if things do get extremely tight, even tighter than anticipated. So it'll be a good show and probably really, really timely for what's going on around the place.

Anthony: (01:33)

Yep. Sounds good!

Sean: (01:34)

Let's kick off with boom or gloom. Where are we going in property?

Anthony: (01:38)

Core Logic just announced that there's been another decline in value for the second consecutive month down 0.6% and 0.2% over the June quarter, so Sydney and Melbourne seem to be leading the way with their declines. So Sydney dropped 1.6% and then 2.8% , and Melbourne dropped 1.1% and 1.8%. And interestingly, there's some locations – like Adelaide, for instance – that are actually holding themselves pretty well in terms of property values. Yep. So everything is in the pot right now. You've got interest rates, you've got inflation – which is causing interest rates to rise as wel, you've got challenges in the lending market. I wouldn't say tighter lending conditions though, we don't really see that. It's just when rates go up, it affects people's borrowing capacity. So yeah, it's continued going down and seems like the trajectory for the next few months is downwards.

Sean: (02:42)

Look, you don't need to look too far to find statistics like that. They're stretched from outlet to outlet. I don't know where some of them are getting their figures, but we seem to find Core Logic is a pretty reliable source with backed up resources and references to where they're getting their data. They're obviously the nation's main source of property data. When we look at breaking it down, right? These are national averages or state averages or city averages. Cities are big places.

Anthony: (03:14)

Yeah.

Sean: (03:14)

The entire country is a big place. Maybe not in respect to the rest of the world, but when you break it down into individual markets, yes. There are still some markets that have been holding pretty resilient – the regional centers. I think the regional centers have only just started to show small signs of weakening in certain places. So the regional centers have held pretty strong. Do you reckon that's down to simple affordability?

Anthony: (03:42)

Yeah, affordability, but also, there's a big rush for everyone to go there. Now that's slowed down. It seems like a lot of businesses are calling people back into the office. People are buying down in Mornington or Geelong who are hardly having to commute now, not the commute they would otherwise need to do...

Sean: (03:58)

I wonder if now the government has clear evidence to support the fact that people will live in the regional centers and commute when they need to – if they don't have to go to work five days a week when they are called back – whether they'll improve the infrastructure for access to the city from regional centers.You know, we've got those five large regional centers around Melbourne. There's very similar circumstances in Sydney. It's too hard to drive in town, you're gonna be an hour and a half to get to work. Someone crashes and blocks the road and the next thing you know, it's like 30 kilometres of carpark.

Anthony: (04:36)

Definitely.

Sean: (04:37)

We'll see how that looks. But I know they've been talking about speed rails from the regional centers for about the last decade.

Anthony: (04:43)

Yeah, it'll take a bit of time, but family homes seems to be holding up okay. So we are still seeing clients transacting in the family home space, and still happy to pay – not top dollar – but within the range or even slightly more, rather than 30% more.

Sean: (05:01)

The ranges are a lot more accurate as well. I had clients preparing to go 10% over the range, and I said, "oh, you might find that you don't need that!". We haven't seen an enormous amount, but like you said, good quality properties in good locations still move pretty fast.

Anthony: (05:21)

Yes.

Sean: (05:22)

So, we'll keep an eye on that and come back to you in a couple of weeks with what's happening once the June data gets released. What we'll do now is cover the recent rate rises. So it's now been a few hours and news is starting to trickle through the media of a 0.5% increase, the second 0.5% increase in a row. Where does that leave us? What are we looking like?

Anthony: (05:48)

Yeah, so I don't have the figures in front of me, but I think the cash rate has gone up to 1.35%. And they're talking about it going up in August by another 0.5%, so they want to get it above 2%, or in that 2% to 3% band pretty quickly, in order to get inflation down and nip it in the bud. But yeah, it's interesting because the RBA made their announcement but what hasn't been talked about is what the banks have been doing. So the majority of banks have been passing the initial 0.25%, the 0.5%, and then the most recent 0.5%, but we've got some non-banks that have actually increased it up to 0.3% higher than what the banks and RBA have announced. Some of these non-banks had quite competitive interest rates, but it seems like their cost of funds and how they get their money – which is a bit different to a bank – has increased as well. So there's some challenges there that weren't documented and it'll be really interesting to see what happens now with the banks, and what they pass on.

Sean: (06:48)

This is just replicating what happened in the post-GFC stage when the rates were firing after that debacle. I know it was the non-banks then that were increasing rates at a faster rate than the majors. The majors would typically go somewhat in line with the RBA decisions, and then your non-bank would basically just go on their own ride.

Anthony: (07:12)

They are. So at My Mortgage Freedom, we're obviously looking at that with our clients and, and we're making sure that we're on top of what all the banks are doing. So you would've thought if there was a 0.25%, 0.5% and 0.5% increase – a total 1.25% increase on rates – the banks would've passed all that on. Well they did, but they actually increased the discount on how they calculate the end interest rate.

Sean: (07:42)

Yeah. So this is confusing for people that aren't in the space because there are a lot of banks out there that just advertise their rate on their website. "This is our rate". We refer to it in the industry as a carded rate. Jump on the website and you see a rate, that's what you get. Major banks have always done it with this pricing discount model.

Anthony: (08:03)

And it's levers!

Sean: (08:04)

Is it over 70%? under 70%? Over 80%? Or is it between 70% and 80%? Is the property in this postcode or that postcode? So there's all these different metrics that basically dictate what discount you're going to get. Let's say, for round figures, that the standard variables is 5%. Then the bank has increased the discount since the rate rises happened three months ago. Yes. The banks have actually increased the discount to counteract the entire first two rate rises.. This one probably won't get fully counteracted, but it shows how much fat the banks had.

Anthony: (08:42)

There are a lot of margins! Yeah.

Sean: (08:43)

So they were able to just cut that overnight and say "All right, we'll put the rates up by 0.5%, but we'll increase the discount by 0.5% and then we're back to square one."

Anthony: (08:51)

Yeah. And they're still making a lot of money.

Anthony: (08:53)

So, here's an example with a specific bank. We definitely won't say their name, but before all these rate increases, their variable rate was 2.2%. So it went up 0.25%, and then 0.5%. So the rate should have been 2.95%, right? And this is before the most recent 0.5%. So the rate should've been 2.95% after all the rate increases, but then they decided to increase their discount and the rate went down to 2.71%. So, it's very hard for people to monitor this. We only know because we do it every day, but a lot of people will be caught out. That's for new clients though, for all the existing clients, they would've gone up by 0.25% and 0.5%. So we're only talking about the new clients who are asking "Hey, what rate can you do?". "Well, everyone else just went to 2.95%, but we're going to offer you 2.71%."

Sean: (09:49)

It's something you've got to pay real attention to. And I mean, each individual customer is entirely different. Everyone's got very different circumstances. And these examples that we've taught now – just as a disclaimer – aren't necessarily your particular set of circumstances. Everyone should speak to a professional and seek their own advice, but we need to encourage people to make the inquiry. There are too many tricks and I can assure you their methods are not to favor the customer. So, we're just basically pointing out these methods that are very difficult to what you see from the outside. Methods used to determine pricing for customers is to basically to set up whoever's willing to pay it, as they'll be happily take money off them. Whoever's not willing to pay it – those who have their finger on the pulse – will continue to push their bank to give them a better price point.

Anthony: (10:46)

Yeah.

Sean: (10:47)

So to wrap up interest rates, we'll move onto the variable interest rate move that we've had today. What is the general sentiment? We've had a huge level of inquiry for fixed rates. Give us a rundown of what has happened to fixed rates in the last 6 months?

Anthony: (11:08)

So fixed rates were really cheap six months ago, they were down at 1.8% and probably 1 in 2 or 50% of our clients would take it up. Who thought it was going to go up so quickly? But people were just comfortable using that, either fixing it all or fixing a portion of their mortgage. And then you fast forward 6 months up until now. You're lucky for a fixed rate has a '4' in front of it. Yeah. In most cases it's got a '5' in front of i! So I think some, 1-year fixed rates are starting in the low 5's. Yeah. I saw some 3-year fixed rates starting with a 6 in front of it. It's moved so quickly.

Sean: (11:50)

That's like 2010!

Anthony: (11:53)

It's crazy now. And, and who was to know? No one thought 6 months ago with the Reserve Bank announcing that rates weren't going to go up to 2024. It's a bit silly in retrospect. Now rates are where they are now. So unfortunately, a lot of people were caught out. A lot of people probably over leveraged at the time they were saying that. And they're the ones that will probably be affected by these rate rises. But anyway, going back to fixed rates. So, they've gone up, and it's got to the point now that banks have increased their fixed rates. So they don't want people to fix. So if you can still get a variable rate around 3%, and they're offering 6% fixed... You're not going to find too many people who are going to choose that when we show them the options.

Sean: (12:52)

No, I mean, it's a gamble, isn't it? You're basically placing your bets that rates are going to shoot past 6%. They would have to for you to get your cash back on that.

Anthony: (13:03)

In the two or three year period.

Sean: (13:05)

Yeah. And no one wants to hand over their dollars to the bank for that period of time for absolutely no reason at all. So, it's one of those things. The other thing is obviously the flexibility of a variable rate. You don't know if your family circumstances are going to change, if you're going to run into any financial hardship or any trouble, you want to be able to exit your position without increased break costs in the event that market conditions change in upcoming months. But I think it's one of those things now where basically we're just going to have to cop the punches and ride it out together because – like you said – you can't fathom paying 6% willingly when we don't know what rates are going to get to.

Anthony: (13:57)

Yeah, definitely. So, everyone seems to be sticking to variable. Everyone's goning to be riding it out. And the banks seem to have their pricing at a point where they're just forcing most people to consider going variable. And hopefully when their cost of funds get a bit better, they may get a bit more margin. But yeah, interesting times! So fixed rates seems to be a thing of the past, unfortunately!

Sean: (14:20)

Yeah. And well done to the lucky guys who fixed between that period of July and October, 2021! Especially if you were conservative enough at the time to go for a three year fixed rate at 1.99% or something like that.. Your conservatism has certainly saved you a couple of bucks over the next couple of years!Anthony: (14:42)No doubt. So, tell us a bit more about the self-employed space Sean?

Sean: (14:48)

This is probably one of the spaces we're exposed to a lot. We deal with people from all different industries. We deal with people from hospitality, retail, construction, transport, manufacturing... We deal with blue collar, white collar, everything. A lot of small businesses over the past couple of years. I worry that they were so busy making money and so busy going through the growth phase – everyone has just been insanely busy – that my concern is they probably haven't set themselves up in their own businesses to weather a storm if it was to come. So there's a couple of areas that I think a lot of businesses have ignored, one being tax. We're starting to see a lot of increased tax bills from 2020 and 2021.

Sean: (15:41)

If you let that go for that period of time, it doesn't take long for it to start to snowball. You've got quarterly taxes and annual taxes. And every time you lodge your annual tax, your quarterly installments increase or adjust. If someone has made a lot of money in 2020 or 2021 – which a lot of our business clients have – their tax installments are now going to be sky high. If their revenue dropped or if their revenue drops in the coming year, they still have to adhere to those tax installments from the previous year, when they were making tonnes of money. If they haven't built a buffer of cash – a safety kitty for their business – that is going to put a lot of pressure on their cash flow in trying to keep up with those tax payments.

Sean: (16:29)

Then you've got your tax installments as well as last year's tax, which is when you've got to be seriously concerned about where you're positioned. The ATO has come out publicly and said, "We aren't going to be so lenient on tax anymore. We've basically just let you have free reign for two years." They've essentially been a bank with 0% interest rates for a long period of time. That's not going to be the case anymore. So, low cash resources, low cash supplies, increased tax, increased tax installments, the price of supplies, the price of labor, the price of staff... All of that is increasing. Then a downturn of sales is going to really hurt. I'm trying to think about any industries that are going to be particularly prone to it, but there hasn't been any consistency. I've spoken to people who have been in trouble with their tax from many different industries, from professional construction or whatever it might be. So what do you think those people might be able to do to try and protect themselves in the years ahead? What do you do? Do you bunker down? Do you downsize? Do you start to go into risk management to keep the doors open? Start trimming the fat?

Anthony: (17:47)

Having ticked over to the new financial year, maybe you see things you that you can trim up and maybe some expenses that you had don't need to be ongoing. I'm sure a lot of people over COVID had social media marketing expenses that maybe aren't going to pay off for them now. And yeah, whether it be staffing – or like you said – downsizing, they're all things you put in the mix. And the key' is going to be having a kitty to protect yourself.

Sean: (18:11)

And I think it's one of those things where you need to throw your ego out the door. You need to throw your ego out the door and say, "Right. If these conditions are going be changing for me, I'd prefer to go into idle mode and maintain my turnover, service my clients' work, keep rhw business alive, keep it vibing, but maybe trim down those areas of fat that you talked about". It's not a bad thing.

Anthony: (18:38)

So there's no long lunches on a Friday?

Sean: (18:40)

Yeah, exactly Anthony. No long lunches on a Friday mate. While I'm back here slaving away. But those are the sorts of things to consider. We just want small business owners to think about that. Would you have a kitty to carry you through those times if they did get tough? And if things did tighten up now, those are the things that need to be thought about. So don't ignore the possibility that the future is potentially going to bring some hard times. We've had it very good for a long time.

Anthony: (19:14)

Yeah. Definitely. And even getting on the front foot now, whether it be acquiring new business or looking at new ways to go about things, this is a great reset for a lot of people and to see what opportunities will be presented. Yeah. So yeah, you just need to be mindful of cashflow, but then look at other ways you can circumvent that.

Sean: (19:33)

Definitely. Now mate, looking at closing out today's chat with the rising interest rate environment, obviously it's important to know what's actually happening. What do you think clients should do to get on the front foot and at least try and put some pennies back in their pocket, should they try speaking to the bank or their broker?

Anthony: (19:54)

So we talked about rates and the fluidity of it all right now, but a simple call to your bank or your broker to review the rate. You'd be really surprised. And we've got someone that works in this role full time. Our customer care manager Shelby contacts all of our existing clients to review their loans.

Sean: (20:13)

Yeah, she does an incredible job.

Anthony: (20:14)

And in most cases, it's simply just speaking to their current bank and getting their loan reviewed. So we say to clients– because we do it every day and we see that it's so easy to save money by just having a chat with your existing bank – go out there and do it. Because it works!

Sean: (20:27)

Yeah definitely, it's one of those things that I think should be done at least once a year at the very, very bare minimum. But obviously the sponsor for this particular podcast – www.ratetracker.com.au – they do it every 30 days. So just checking your interest rate every 30 days against the benchmark. I don't know if it was divine timing for them to hit the market and come out with that product nine months before rates started shooting for the stars, but we're lucky we do have technology out there that's available and free to use, to basically watch over you for the future when it's going to be choppy.

Anthony: (21:15)

Yep. For sure. Never overpay on your mortgage again!

Sean: (21:17)

Exactly. That's a wrap mate. Let's bring it back next time. You're off to Singapore tomorrow, yeah?

Anthony: (21:24)

I'm off. And then you're off!

Sean: (21:26)

Then I'm off to Ireland.

Anthony: (21:29)

To the promised land, the motherland!

Sean: (21:31)

Yeah. To the motherland to hang out with family and have a look around. Hopefully we might crack 24 degrees on a nice warm day there! We'll be back at the start of August. Enjoy your break mate.