State of Play: Lower Mortgage Rates But Check Your Credit Report

Dominique Grubisa
Dominique Grubisa

Published 6:48 am 29 Jan 2021

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Hi there, and welcome to our State of Play. Well today, there’s a little bit of good news and a little bit of bad news. So what do you want first? I’m going to go with the good news. Always lead with the good I reckon. So right now, we’re seeing really, really low mortgage rates. We already know the Reserve Bank recently dropped rates as recently as March of this year, and that was an emergency drop. So outside of a scheduled RBA board meeting at the first Tuesday of every month, they dropped rates 0.25% in response to coronavirus. So rates, official RBA rates, are sitting at 0.25%, lowest ever in history. But they’re now predicting, after the governor, Philip Lowe, said our rates won’t drop any further, we’d never go to zero in Australia, half of analysts and economists who they poll are actually predicting on the first Tuesday in June that rates will drop again. So it’s more than a 50/50 bet that rates will drop if you listen to those experts.

Having said that though, it does mean that there have been further drops outside of the RBA drop. So there’s been a virtual, like a knock on effect easing of what banks are offering. So the reason for that is a few, but the lower interest rates, they’ve ultimately passed that on. But also, banks are getting cheaper money. So the Reserve Bank has improved liquidity. They’ve exercised what they call quantitative easing. They’ve bought a whole lot of government bonds and they’re lending money to banks really cheaply. So it means that the actual cash rate has dropped an extra nearly half of what is. So the cash rate is 0.25%, but it’s fallen to 0.13%, and that’s because of the cheap money. The other thing that’s happening is that… So the Reserve Bank’s pumping more money in cheaply that the banks are getting access to, these swap rates. So what banks basically charge each other to borrow internally.

So look at it as wholesale money, what they’re able to get money for to lend to us, the price of that has dropped and they’ve passed some of that on. And they’ve got more money themselves. So there’s billions of dollars that the RBA has given them, plus people are hoarding, people are saving more and super funds aren’t spending because it’s so uncertain. So the banks have a lot more money to play with and to lend out. And supply and demand, a lot more quantity, means there’s a big supply. So it lowers the price. So it means there are really, really good rates out there. So the great news is go back to your lender and negotiate a lower rate. So lower rates mean banks are offering bigger discounts on mortgages to good clients. So they’re paying less, they’re getting the money for less, it’s a lot cheaper for them, which means they’re dropping rates for you.

So according to RateCity, 54 lenders have cut at least one of their variable rates for new customers that have joined them since April 1st. So the official cash rate, remember, hasn’t changed since March 19th, but since April 1st, 54 different lenders are vying to get new business. So you can go to those lenders and say, “What can I get?” And if you can’t be bothered going through a refinance, go back to your existing lender and say, “Hey, this bank can give me this deal,” and they should match it. They’d rather do that than lose your business because the cost of acquisition for a customer is really high for the bank. So they’d rather keep you as a customer and match what rates are doing elsewhere. The benefit of the lower cash rate, even if they drop next month, so if the Reserve Bank do drop rates further, that probably won’t be passed on because banks have said, “Look, our margins now are so slim. We’re just not making any money.”

So if we look at Westpac as a guide, one of the big four, and deep dive into that, what’s happened is first of all, they make their money a few ways. They make their money by lending money. So they’ve projected in the pipeline all of these repayments that would come in. And what’s happened now, [inaudible 00:04:33], a lot of mortgages are just frozen. So that income that they were expecting isn’t happening. So that’s a cash flow issue. The second thing that’s happened, they’ve paused all those repayments, they’ve got a lot of delinquent debt. So people who may not pay at all, and they’ve got to be ready for that. So a lot of banks didn’t pay dividends last month. So even though they had good profits leading up to the year. So the cut-off date where they measure their six months figures is 31st March.

So if we look at Westpac data, we can see here that their value, their share price, has fallen off a cliff because of COVID. So they’ve revealed in their figures for up until 31st March that half, they’ve said that they’ve had a 70% slump in first half cash profits. So it’s down to $993 million. So they didn’t pay dividends because they said we’ve got to keep money in reserve for the backlash from COVID. So their COVID response was, first of all, that they’ve got 22,000 employees working from home. And they’ve also said this was their formal report, publicly listed company. They have to put all the information out there. They’ve said that in terms of their home loan customers, they have deferred $39 billion in mortgage payments. So that’s across 105,000 mortgages, and they’re offering special rates.

Similarly in business, they’ve deferred $8 billion worth of business loans, 31,000 customers there. And they’ve given people a lot of bridging money to tide them over until government stimulus packages came in. So thousands of people there. And they’ve offered much lower lending rates and big discounts just to keep people afloat. And that was because the Australian Banking Association and APRA and everyone got together with the government and said, “Okay, we’re going to give the banks, the RBA will give you really cheap money. You got to pass on the favor.” But that is hurting the banks. And remember, COVID really didn’t kick in. We went into lockdown on about 26th March. So these figures only take us to 31st March. But in those four or five days, we already saw an uptick in bad debt.

So you can see here, post-GFC, that’s all the bad debt there, that really big bar on the left of the screen. But here, March 20, when we went into lockdown, you can see an uptick there in delinquent debt. So they measure debt when it’s 30 days past you and then they also look at really badly delinquent debt when they start to take legal action and repossess houses, is 90 days plus past year. So you can see the spike here at the end of these graphs that they really ticked off because of that spike at the end of March. Now, this data doesn’t include hardship loans that were put on pause by consent. So people who’ve asked for loan holidays for… Well Westpac only allowed three months, but other banks have allowed six months. Westpac said, “Let’s give you a three month holiday and we’ll review.”

So that doesn’t measure that debt, that measures people who were behind on their mortgage anyway, and whether or not it was due to COVID, but it’s spiked at the end of March. So we’re going to see that trajectory grow when the next lot of figures come out to cover April, May, June. And it’s really only going to get worse from there. The other thing is we probably may not see as much of the figures. So we have laws in Australia that say that publicly listed companies have to share their data, because if they’re offering shares, people have to do their due diligence. So if I’m going to invest in Westpac and I want to do all the research, I have to get a transparent view of what’s happening. So I have to see stats and data like this. What’s their delinquent debt? What are they investing in? What have they done for COVID? That should all be transparent.

But Scott Morrison and Josh Frydenberg have just announced that banks and generally publicly listed companies don’t have to have that level of transparency now because of COVID. To comply with it they’ve said would be hypocritical because how do they know? We’re saying that they have to make good decisions and they have to be transparent, but we as a government don’t even know what’s happening. So it’s really setting boards of companies and directors up for failure to have to make predictions because there’s this onus by law to be transparent and to publicly make predictions, and give all your data out. And what if they’ve made a prediction and it’s wrong because of the uncertainty that we’re in now. So what they’ve said is that they have to give it their best guess, but they don’t have to provide that sort of data. And if they provide something and it later turns out to be wrong, people can’t sue them for it.

So the next six months they’ve pretty much got, all publicly listed companies, have got protection. And they actually said if they get it wrong, the idea is that they have to be responsible. But if we’re making them publish data that they have no idea whether it’s wrong or right because of the uncertainty, then they’re opening themselves up to lawsuits and negligence. And we’ll just give them protection, a moratorium for this period because how long is a piece of string? Who knows what to predict? And other industry groups have said, “Well hang on, that’s not fair.” That means everyone’s capital raising, so the banks are actually going out there capital raising to get money to cover these delinquent debts. And then that means that they can put any information out there, people will rely on it, they’ll invest the banks or capital raise and that they can say whatever they want with immunity just to get the money. And then later, it could be wrong or it could be false and they can go, “Well I’m protected by law.”

But anyway, it is what it is. They’re the rules that have changed. So if you’re looking at the share market, just be very careful about what you say, because they can say whatever they want at the moment with immunity. The other thing that I want to mention, I said I’d give you good news and bad news today. So the good news is a lot of lower rates out there because banks, although they’re suffering because they’re having to support, so their profits are a lot less, they’re giving people loan holidays and the government and APRA and the Australian Banking Association have mandated all of that. But the problem with that is, and the flip side is, it’s great if you can get those low rates, but many of our clients and many people out there have been a bit blindsided by the speed at which this has all happened.

So who remembers, if you’re old enough to remember, the Y2K drama? When we first had computers back in the 1960s and ’70s, and we started to get home computers, no one ever thought far enough ahead that we would actually be changing millenniums. So everything was set up and all the automated dates had a 19 in front of them. And then they were going to flip over, but they would go back to 1900 or 1901. They weren’t calibrated to go over to 2000. And we’d all tethered ourselves to this technology. So doomsday preppers were bunkering down. They were saying the world’s going to end and all money will be sucked out of banks when the computers take over and the dates are wrong. And they were all trying to get their house in order. And none of it ever happened. But a similar thing has happened with banks now. Not the Y2K, at least they had a few years to get ready for that.

But what’s happened at the moment is that we have had the laws changed so much. And if you know that if you can imagine the enormity of banks with millions and millions of customers, billions and billions of loans and debt out there, and suddenly they’ve had to get ready in the space of days to calibrate themselves for loan holidays and people having pauses and that sort of thing. And it’s probably an unintended consequence, but what has happened, and we’re seeing this especially in our debt management department across the board and in finance, is that back in September last year, they brought in a regime of comprehensive credit reporting. So what that meant was that banks, instead of just having five criteria, so we had credit reporting agencies like Equifax and Veda and places like that, that would keep a history of your credit.

So if you’d ever applied for a loan before, someone could see it. And banks, institutions, anyone offering credit, mobile phone companies, would actually do a search of your credit background and your credit score to see if you were a risk if they lent you money or gave you credit. Now, across the world, they had a lot more rigid data and information on people’s backgrounds. Australia didn’t subscribe to that until September of last year. So you may have heard in America, they talk about FICO. Their FICO is their credit score. And that basically defines you. And people talk about it at dinner parties, “I’ve got a really good FICO.” What your FICO means in America is if you’ve got a really, really good credit rating, you can qualify for more loans, but you also qualify for really, really low rates because you’re a really low risk to the banks.

So we’ve brought that system into Australia as of September last year. So instead of just reporting on five points of minimal data like past loans you’ve ever applied for, there’s now 30 plus points of data that they record. And one of the things that they record that they never recorded before was when you pay your loans. Do you pay your mortgages on time? And they’ve calibrated the system and your credit score so that if you’re late in paying your mortgage or your debts, that it pulls down your credit score. So they’ve got an algorithm behind that. So general rule of thumb, if you’ve got a credit score, and it’s out of 1,200 by the way, if you’ve got a credit score below 500, you won’t qualify for credit. No one will give you a loan. Under 500 is really, really high risk and you’re just not a good bet for someone to lend money to.

If you’re above 800, 900, up to 1,200, smooth sailing, you’ll qualify for really, really low rates. So those rates that I’m talking about out there that the banks are offering right now, you won’t qualify for those if your credit score has been affected. So what has happened with COVID is that the Australian Banking Association, APRA, the government, the Reserve Bank, they all got together and they said everyone who’s having hardship because of COVID or otherwise gets a loan holiday up to six months, and we’ll reassess then. And there’s to be no penalty for that. There’s no way you can hit their credit score, there’s no way you can charge them penalty or default rates. It’s a hibernation. Remember when they said we’re going into a hibernation, it’s like an induced coma.

So what’s happened is that everyone’s applied for those loans and the banks have scrambled to get it together and to get the freezers in place. But what they haven’t thought about, it seems from the clients we’re seeing, is to link that to the comprehensive credit reporting. So that algorithm, the credit reporting agencies are going in saying that people are late for paying their loans, and then their credit score’s getting pulled down. So here’s a client that went to just get a mobile phone replaced and go on a different plan. And last time they checked their credit score, it was in the 900s. So really, really good credit. And the other day, they got knocked back for a mobile phone because their credit score was 426. And they said, “How come my credit score be 426? Two months ago, it was at the 900s.”

What had happened, and these credit reports are 12 pages long, but when we looked at their loans, so there was a loan from Westpac, they got a loan holiday for three months. So they got April, May, June. How it’s recorded there is that they have not paid their mortgage. So that’s pulled down their credit report. Similarly, NAB got a holiday and again, in March, April and May, it’s recorded them as not paying or paying late. So their systems aren’t sinked and in the background, that’s affecting a credit report. And you can’t access the low rates that you could take advantage of right now. So it’s a catch 22 because the bank now won’t fix that. And so it becomes a headache. So before anything else, I highly recommend two things from today, A is the good news. You shop around for better loans, better deals right now and post-COVID.

So none of this hardship will affect you post-COVID. They’re not allowed to use it against you, so it should be a total hibernation. So the second thing is shop around for better deals, better rates, better loans, go to your bank renegotiate. But also look at changing, but have a look, just check your credit report. So you can go to the credit reporting agencies and you can order it yourself, but it’ll take about a couple of weeks to get it. And you probably won’t understand it because it’s 12 pages and it’s all this. And you’ll just see a low credit score and you won’t know what it is that’s pulling you down. So if you want more information on any of that, you can book a session now with one of our specialists. We can order the report for you. So you can book an appointment at We’ll pull your credit report for you.

That won’t be recorded in any way, it won’t reflect your credit score. We can do a health check as to your credit score and see and just check that the right hand knows what the left is doing. And this mandatory comprehensive credit reporting, where these credit reporting agencies actually take your data and put it up there, make sure that it’s reflecting who you really are because it is like your identity now, it’s going to follow you for life every time you apply for credit, you get a loan, you buy something. They’re going to pull your credit report. Unfortunately, in the digital age we live in, our record, we leave a digital fingerprint everywhere we go. And then that then defines us and it can affect us financially in the future.

So it’s really, really important, especially when the computers have gone all Y2K on us because we’ve changed things so quickly, that we make sure that your fingerprint is absolutely the best that it can be. And it all gets cleaned up. These things can be cleaned up, even if it is a true reflection on your credit report, it can be fixed. We can find out what’s pulling you down and fix it with the lender. So have a check on that. We can pull it for you quickly, no charge and just makes sure as a member of our community that you’re firing on all cylinders and ready to go with the opportunity that’s out there. So we’ll put that link in the description for this session and we’ll also put it in the comment section for you. If you go in there, you can book a time and someone will talk you through your credit report, what it means and what options you have for that.

That’s it today, but please share this with friends, with family, with anyone who can benefit from this. Follow us on Facebook if you want regular updates, tag in friends and family in the comment section. And if you’re watching on YouTube, don’t forget to like and subscribe us, hit that bell and we’ll notify you of future sessions. As always, stay safe, take care and we’ll talk on our 402 on Thursday.