According to RBA figures*, about 35% of outstanding housing credit was written on fixed terms. Approximately two thirds of this exposure is due to expire in 2023.
Short-term fixed loan rates averaged as low as 1.95% in May 2021 for owner-occupiers, as bank funding costs plunged in line with the RBA’s temporary Term Funding Facility and fierce competition among lenders.
However, when fixed terms come to an end this year, they will be re-priced at much higher rates. Factoring rate hikes to date, average variable rates are already approaching the 6% mark for outstanding owner occupier loans and above 6% for investors. This is the ‘cliff’ that many borrowers are dreading, and lenders may lack the tools and capacity to tackle.
In this environment borrowers will undoubtedly be looking for better deals from their current financial institution or, failing that, from other lenders. Unfortunately for some households, interest costs together with the high cost of living could rise such that they may fall into arrears, and, being unable to refinance, will have to work through other available options with their lender. In extreme circumstances, this may result in borrowers having to sell their property. Large value gains in the past few years mean that a relatively small cohort of borrowers may actually be unable to pay off their debt with the sale of their home but this is an increasing risk. Since April 2022, national home values have fallen -9.1% through to the end of February.
Lenders are under pressure, facing a raft of critical decisions that need to be made in order to pe prepared. Those who can’t distinguish their best customers from those at risk of hardship will miss vital opportunities emerging in this challenging lending environment.
Armed with the right strategies and digital tools, lenders can be primed and ready to optimise lending strategies for customers with the highest amount of equity, prevent at-risk customers from reaching the cliff edge and proactively identify customers experiencing hardship.
“We’re here to support banks and lending institutions with the most intelligent data and technology available,” product, data and analytics executive Tim Jenner says.
“This way, banks can build proactive, scalable strategies to help manage the refi cliff and still deliver a superior customer experience.”
Here's how.
1. Know your best customers
Which customers have the highest equity and the biggest buffer against interest rate hikes? When you know these customers, who may be less sensitive to changes in the market, you can target them for prime retention offers.
By targeting your optimal customers – those most able to manage through higher interest rates – you give yourself the best chance of shoring up your loan base in difficult economic times.
In a rate-driven market, however, your best customers will be harder to retain, just as the best refinance prospects will be harder to win.
Smart property data and mortgage solutions can help you identify and analyse your most resilient customers, placing you in the driver’s seat for strategy development, creating the opportunity to supercharge your refinance and retention planning.
Calculate a dynamic Loan to Value Ratio (LVR) for every security, then ringfence high-equity customers for your top financial products, using Portfolio Analytics.
With early alerts of listing activity from Propensity to List and Property Monitor solutions, you can use targeted nurturing to stay close to your customers.
Get detailed property data, insights and reporting at your fingertips, allowing you to support customer engagement in the long term. With the insights yielded through Digital Property Reports, you can help homeowners make smart financial decisions through every stage of the property-owning life cycle.
2. Know your customers at risk of hardship
A proportion of customers will inevitably suffer hardship as economic pressures bite. With more fixed loans reverting to variable rates, serviceability will become harder for customers with fewer resources to fall back on.
This pressure on loan affordability and rising household costs, driven by inflation, will cause an uptick in distressed sales. This could place further downward pressure on property values, making it harder for lenders to recover mortgage debt if they or their borrowers are forced to sell their homes in an already declining market.
Our digital mortgage solutions can help you develop strategic plans to alleviate customer distress and reduce future losses through providing borrowers with appropriate hardship assistance. If, however, sale of a property is unavoidable, borrowers can be guided through the process to help optimise sale proceeds.
Identify and use the customer’s equity position to pinpoint hardship quickly. Access Portfolio Analytics data to dynamically surface loans in your portfolio with a high LVR, then monitor the loan for potential difficulties.
Use Property Monitor alerts to identify customers that have listed their property for sale or for rent indicating possible distress. This can be done proactively, without waiting for the customers to reach out first, in order to assist them through a difficult process.
Easily identify locations at risk of declining value, where it’s harder for customers to meet financial commitments and refinance their properties. Location Risk offers critical Propensity to Decline statistics, modelling areas with a significant probability of value decline over the next eighteen months.
3. Know where your opportunities lie
There are plenty of opportunities to target non-home loan customers, as well as those holding mortgages with your competitors.
Data-driven insights mean you can upsell or cross-sell refinance or insurance products to existing customers. Tailor the offers to the right customers, and work out where your best prospects for new business lie.
With Home Loan Elsewhere, you can find non-home loan customers with mortgages at other financial institutions and engage flagged owner occupiers, using targeted messaging.
Focus on locations of mortgage resilience and opportunity, by accessing property density, single industry flags, distance to nearest major town/capital city and Propensity to Decline statistics. Location Risk opens the door to fast-track opportunities in blue ribbon locations.
You can also flag early notice of customers who have listed for sale (or are most likely to), ahead of a rate reset, via Propensity to list/Property Monitor.
Mitigate the fallout from the refi cliff. Reach out. Ask your account director or visit our Banking and Lending page to learn more about how CoreLogic property data products can work for you.
*Reserve Bank of Australia, Financial Stability Review, October 2022, https://www.rba.gov.au/publications/fsr/2022/oct/pdf/financial-stability-review-2022-10.pdf
Meet Eugene Vassiliev
Head of Financial Services Solutions
As Head of Financial Services Solutions, Eugene leverages over 25 years of banking and insurance expertise to lead the company’s strategic initiatives that best position CoreLogic for revenue growth, innovation and great customer experience.
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