Current Market Insights
The Current Market Insights Podcast is brought to you by Harris Partners Real Estate.
Understanding the property market can be a challenging thing, with highs and lows, twists and turns. The media and agents tend to spread the news they want you to hear, with the advice they want you to follow.
Current Market Insights is an unbiased look into what is happening, what tips you can use to buy, sell, or rent, and that you wont find anywhere else.
Current Market Insights
Episode 69 - The Mortgage Broker's Guide to the (Lending) Galaxy
Hosts Ciaran O'Brien and Peter O'Malley dive into Australia's mortgage landscape with Todd Coleman from Mortgage Choice Inner West. We unpack the crucial role mortgage brokers play in connecting home buyers with diverse lending options, often beyond what single banks can offer. Todd discusses how “best interest duties” have reshaped the broker-client relationship post-Royal Commission, ensuring client-first practices in the world of loans.
For those looking to connect with Todd and discuss all things lending, please head to https://www.mortgagechoice.com.au/todd.coleman.
Alternatively you can connect with Todd via Email or Phone.
As always if there is a specific topic you would like for us to cover, please reach out and let us know!
All down, all silent, going, going, going, go on son Congratulations.
Speaker 2:Welcome to the Current Market Insights podcast brought to you by Harris Partners Real Estate. Each episode we chat with real estate author and industry leader, peter O'Malley, to discuss the current property market conditions and provide insights to assist you on your property journey.
Ciaran O'Brien:Hello and welcome to another episode of Current Market Insights. I'm your host, kieran O'Brien, and with me, as always, is my good friend and co-host, mr Peter O'Malley.
Peter O'Malley:Hi, kieran, great to see you
Ciaran O'Brien:, great to see you, peter. We also have another special guest with us today, peter. We have Todd Coleman, who is a mortgage broker from Mortgage Choice Inner West, and we're really excited to have you with us, todd, welcome.
Todd Coleman:Great to be here, thank you.
Ciaran O'Brien:Thanks for coming in, todd. So before we start the conversation, I just want to outlay for our listeners that we are chatting today, todd, before the Melbourne Cup Day interest rate announcement, and for most of our listeners you will be listening to this after that all of you in fact. But we are still going to hold pretty firm with what we talked through in the episode and we're confident that a rate hole is still probably on the cards. If that is different, well, you know, that's life.
Peter O'Malley:It's a shock to everyone.
Ciaran O'Brien:It's a good problem to have. That's right. So thank you for coming in, todd. We're really excited to have you here and we really wanted to spend some time today and just unpick and unpack in many ways for our listeners what is mortgage broking in a very broad sense, and get an understanding from you of what's the industry like. How is it to engage for our listeners, what's the process, what are the tricks and the tips and all those kinds of things.
Ciaran O'Brien:So hopefully you're ready to go and we can we can kick off
Todd Coleman:well, mortgage broking , I guess, as an industry in australia, started about 20 odd years ago partly because banks started to, you know, reduce the number of bank managers that they had back then and that has progressed ever since. An accountant explained to their client that I was basically their new bank manager and I think that's probably a good way to look at a mortgage broker. Instead of one bank behind us, there's 35, 40-odd banks behind that we can use, and so your mortgage broker becomes the intermediary between you and all of those banks behind. Because, much like if you go into a Ford to buy a car and you actually want a Holden, ford's never going to tell you to go to the Holden dealership similar with a bank. So if you come to us, we look at the best bank for the client. If you go to the bank, you get the product that they have, whether it suits you or not.
Ciaran O'Brien:Okay, so one of the major benefits to brokers is, as you say, that kind of unfettered access to a much larger pool of money. Do you, or is there any tendency within the industry not necessarily just within your business per se, but is there any tendency in the industry to favour particular lenders? Do you have favourites that you like working with, or do you find some that are easier? What motivates you to necessarily preference one lender over another?
Todd Coleman:Well, that's a good question. In the past there was probably a perceived conflict of interest. That's been done away with. Best interest duties were introduced, so there is an obligation for a mortgage broker to actually go through what the process to find out what is the best for the client, not what is best for the bank or the mortgage broker. Sometimes that can mean that you're effectively working for free because you're doing something that's not going to generate any income to you but it's the best interest of the client okay, so you those changes were fairly recent.
Ciaran O'Brien:Are they off the back of the royal commission a couple of years ago? Is that correct?
Todd Coleman:effectively they are. They are, and the reason, though, that I actually started with mortgage choice, that was, mortgage choice had an inherent process to sort of get rid of that conflict of interest anyway, so we just follow that same process that we had, which, basically, is best interest duty okay.
Ciaran O'Brien:So, uh, you're operating in the best interest of the client and, as you say, there are scenarios where you will. You know you take your responsibility to them seriously enough to to preference their need over business aid or whatever it might be. Other than having great support and someone who knows the system well, are there interest rate benefits to going through someone like yourself as opposed to direct to a major lender?
Todd Coleman:Yeah, that's a good question. Yes, there is. Sometimes you can know what's coming up. Lenders will generally never say that yes, there's going to be a rate drop or yeah, look, we're going to be doing a special discount or that sort of thing. But you can be going in and arguing the case for a better rate for a client. I'll give you an example. I had a first-time buyer. We had a pre-approval from a particular bank. When he found his property we went back and said, look, he's got a better offer from this other bank, can you match it? They went away. They came back and said, yes, we'll match it. Now, if he'd just gone with that other bank, he would have ended up with a higher rate than what he's now on.
Ciaran O'Brien:Yeah, that's a great outcome. I guess the other questions I have around that kind of scenario is not only negotiating better rates for your clients, but is there benefits in, or do you find better success rates in, actually obtaining lending if you do go through a broker, as opposed to direct to a major lender?
Todd Coleman:I can only talk from my experience. So, yes, we generally find that 95 times out of 100, you're going to get a loan for somebody. It may mean that you actually end up having to go to another lender to get that loan, but that's. My job is to make sure that I'm taking that person to the right bank for them, and that's going to depend on different scenarios whether they're self-employed, how long they've been employed if they're, depend on different scenarios whether they're self-employed, how long they've been employed if they were in a role, whether they're casual. How did they get their deposit for their property? All of those things that we have to weigh up to figure out what is the best bank for them.
Speaker 1:Todd, what interest rate should we be paying on our home loans at the moment?
Todd Coleman:It's the million dollar question. Unfortunately, it does depend on a few things. It will depend on whether you're looking at principal and interest repayments, interest only repayments, whether it's an owner-occupier or whether it's an investment loan. But generally, if you're an owner-occupier, you should be very low sixes.
Speaker 1:Yeah right. So is there anyone offering in the fives at the moment?
Todd Coleman:There are some options if you're looking at something like solar panels or green loans. There's some really good deals on those that are in the high fives.
Speaker 1:So, todd, when the bank charges investors a higher rate than owner-occupiers, I know they're probably justifying that through a risk component or a perceived risk component, and I don't want you to necessarily throw stones where it's unjustified, but is that a form of price gouging?
Todd Coleman:Yeah, Banks will always price based on risk.
Speaker 1:So, as you say, that perceived risk is higher for an investor because maybe the rental return doesn't come through, and it's why when you see commercial rents Sorry, just on that point, you would suspect that the risk with an investment in some ways would be lower because it's got independent income underpinning it, as opposed to a home loan which is quite often subject to one person's earnings in many households. So it could be argued, I would argue that in some ways a home loan, a big home loan to an individual who has to go to work, would be riskier.
Todd Coleman:And that's why some of the banks will actually do what they call a combo, so they'll do owner-occupier and investor at the same rate. So that's always something to look out for for people who are in that situation. But a lot of things happen in banking because that's the way it's always been, and it might not necessarily have a good business case as to why they do some of these things, but their policies have been based on something that's been around for a long time. When you challenge the policies, often people can't explain why the policy is there. It's just the way it is.
Speaker 1:So we've seen disruptors in this space the Athena model let's talk about that, for example. Do you want to give the listeners who might not be familiar with it an understanding of what the Athena model is?
Todd Coleman:And just to disclose, because Mortgage Choice does actually have a white label offering of Athena, so we do actually use Athena as a product. So the Athena model is a very they're a tech-based bank so they can run at a lower cost. Their model is that as the loan-to-value ratio reduces, that your interest will also reduce. The interest rate will also reduce. So there's an inbuilt way of lowering your lending costs over time. But also they don't have the upfront fees like the application fees, the settlement fees, things like that. So their model is much more client focused.
Speaker 1:And has it taken off in the marketplace, or is it something that's struggling to get a foothold? The advertising is pretty aggressive, but how's it?
Todd Coleman:performing. I can't speak for what their volumes exactly are, but I know when I look at them as an option for a lot of lenders it does become quite compelling to use them.
Ciaran O'Brien:I must be not getting the advertising. I don't think I've ever heard of an Athena model, but I mean that seems like a logical it is a brand, not a model, isn't it?
Todd Coleman:It is a brand.
Ciaran O'Brien:It's a brand, yeah, I mean, just hearing the description sounds like a great concept. I mean, as a consumer, that sounds like a great way to do business encourage me to pay it down and reward me for doing so. Is it that style? Not just Athena, but, I guess, tech banks and online banks you know we've seen a bit of a revolution in that space over the last, say, five to seven years. Anyway, do you find that a lot more of your, your lenders that you deal with, are they starting, or have they already kind of transitioned their business model to be lower overhead sort of more digitally focused, without, you know, worrying so much about the consumer interaction component?
Todd Coleman:well, I think, if you look at some of the those um fintechs that have come through and then been purchased by big banks as well, if you look at 86400, which was a fintech, was purchased by.
Todd Coleman:NAB and it's now their UBank model, so the big banks do see it as a viable business model and one that consumers are willing to take as well, and consumers have become much more adept at using apps. Most people will do banking now just on the apps. I don't think a lot of people sit at a desktop and log in anymore, and that's evident too when I'm speaking to people. They can pull up information literally while we're sitting there talking as to what they're sending screenshots and that sort of thing so they can tell me the balance, what the interest rate is, all of that information. That was stuff you had to go and pull paper out of a filing cabinet for.
Ciaran O'Brien:Yeah, I must admit I'm not surprised to see the transition. I mean, it is so much easier. Being honest, I probably couldn't even tell you what my bank client ID is. It's been logged into an app for so many years now I wouldn't even have a clue bank client id is. You know, it's been logged into an app for so many years now I wouldn't even have a clue.
Ciaran O'Brien:Uh, I I wonder, with banks like, as you mentioned, new banks a great example where it's, it's been, you know, completely gobbled up by a major lender um, do you think that the average consumer's appetite for just digital banking generally, not necessarily just app based, but do you think that their appetite to move away from the major banks and that sort of archaic view of banking is becoming more prevalent? And when you are meeting with clients, do you find that they're coming armed, potentially with a preference for, like a lender or a style of lender, as opposed to, you know, maybe some time ago, where they'd just turn up and say, hey, we want to get a house, can you help us get some money?
Todd Coleman:Yeah, I think people now, just with the use of other online functions, people are more willing to use that sort of product offering. I do think as you start to talk to people as well who may be not okay with, like an Athena model or that sort of thing, that you ask how they interact with the bank, people start to realise that they don't need to go to a branch, they don't need to call a call centre. They'd actually rather do it by sending a request on the app and asking for a rate review on the app, and so when you start to explain to them what their options are, they'll start to look at those sorts of things.
Speaker 1:Todd, the median house price in Sydney is around $1.4 million. Have we got a sense of what the sort of average mortgage in Sydney is? It's just under $800,000. Okay, so people are geared to the tune of about 60%.
Todd Coleman:Yeah, and it depends on the areas. Obviously, being in the inner west, we have probably well, in some respects we have a larger price, so the median price in the inner west is probably a bit higher than that.
Speaker 1:I'd have to guess the median loan in the Inner West is higher than the $780,000, yeah, yeah indeed, and you've told us already today that for a home loan we should be looking for a mortgage rate in the sixes During COVID mortgage rates. The lowest I heard, I think from memory, was $1.89.
Todd Coleman:Yeah, that's about right, did you?
Speaker 1:see any lower than that.
Todd Coleman:No, that was look if you can get 1.89, it was great. Yeah 1.9s and below 2s were very common.
Speaker 1:I heard lots of 1.99s and 2.09s, so that's about where mortgage rates bottomed. So they've tripled Everyone, except more than tripled in some cases. But the mortgage cliff that many feared didn't eventuate again without breaking any confidences. But you do look at people's finances. Why and how did we avoid the calamity of the mortgage cliff?
Todd Coleman:Yeah, I think there was a few things. People didn't have the ability to spend money during that period of time, so people were able to increase their savings. People used offset accounts quite well, so people did have an ability that when the rates did go up, that they could make those payments at the higher rate. I think there were some people, unfortunately unfortunately that were in over their head and they did either have to go on to some sort of ask for some forgiveness from the bank and some people did have to sell, but definitely it was never going to be.
Speaker 1:What does ask for forgiveness mean?
Todd Coleman:Just asking for a holiday, to like a six-month period of no repayments or minimum repayments.
Speaker 1:You took me back to my Catholic childhood day, Todd.
Ciaran O'Brien:So we should all ask for forgiveness. It's something you'd be very familiar with, I think, Peter, asking for forgiveness in Catholic school.
Speaker 1:Yeah, so asking for forgiveness with the bank is what.
Todd Coleman:Yeah, so just effectively going in and asking can we put a hold on the repayments for six months or can we just do interest only for six months?
Speaker 1:So there was a number of options for people to do that, and the banks were and are flexible in that regard.
Todd Coleman:Yeah, because the banks are sitting on a situation where if they do push someone to keep making those repayments and then they do have to go to a mortgagee sale, they're probably not going to get as much back as what they could if that person can get over that hump. Now it does depend on the situation. It might be that the person had a business and the business was having to sort of trade out of problems. It may have been somebody was off work for a period. So it does come down to an individual situation.
Speaker 1:Yeah, but is that the driver for the bank? Are they acting with a conscience or are they acting with? This is not good commercial sense to send this person, this customer, into mortgagee in possession so let's just nurse them out of it and play the long game. Or is this lessons from previous downturns and they've, in their mind, got a new and better way to handle a situation?
Todd Coleman:Well, I think in each case they look at the individual business cases to be harsh. But they don't want to also have that reputational issue coming through to say that they're pushing people out of their houses. So if they can see a way out for that person, they're probably going to give them that time to get through that for that person.
Speaker 1:They're probably going to give them that time to get through that. And is there a you know from a historical, recent historical perspective? Is there an appetite for home lending at the moment, or are you seeing it? Are you seeing the numbers tightening up?
Todd Coleman:I'll give you an example. This is one I was looking at yesterday. So the process that I will go through is identify the person's financials, put it into our system and look at all of the different lenders who are out there. These people were probably looking at a loan of about 1.3 was the maximum they wanted. Now, across 35 lenders, I could get up to 1.5 or down to 700,000. So yeah, in that respect, some people have got a good appetite and others are very risk averse at the minute.
Speaker 1:Yeah.
Todd Coleman:But there is still the ability to borrow money if you've got the.
Speaker 1:And what about new loan? Starts Like what's inquiry like for people looking to come into the market.
Todd Coleman:Yeah, still a lot of first-home buyers interested, definitely. Obviously, you would know we go through these waves of investors or first-home buyers. It is a bit of a mix, but I think there's more first-home buyers to investors at the minute.
Speaker 1:Yeah, that would be our experience on the ground. I showed a good apartment this morning in Glebe and it was first home buyers over investors, which was good to see. It was an apartment that would draw a really healthy rent and the tenants of such properties have probably decided well, if I'm paying that much in rent and mum and dad are happy to help me into the property market or they've managed to save a deposit of their own volition why help me into the property market? Or they've managed to save a deposit of their own volition, why not get into the property market now?
Todd Coleman:And that's sort of what I'm seeing is people who are spending X dollars on rent and they're asking how much could I actually borrow? Often they're amazed at what they can actually afford to go and get. Often, unfortunately, the issue comes down to deposit. Some people just haven't been able to save that deposit and that's where some of the things like, as you say, peter, with looking at family guarantees. The other thing is, there's a few lenders out there now that are going up to 85% loan-to-value ratio before lenders' mortgage insurance comes in, so that's a great help for first-home buyers as well.
Speaker 1:To get started Exactly Todd. The money markets as we speak have the first rate hike not fully priced in until July 2025. That would be a very, very long eight to nine months for a lot of people. When do you think they will cut interest rates?
Todd Coleman:How long is a piece of string? It changes, unfortunately. It will change and it always does. If you look at the big four banks, they've all got predictions of February. Other forecasters have got for later in the year as well. But we're also coming into a period, at the minute of Black Friday, sales Christmas that's going to impact the amount of spending. That happens. We've got an election in the US. What's the result? It seems pretty knife-edged, nobody knows. And you've got budgets just come out in the UK. That's going to have some impacts, not as much as, probably, the US election. But there's a lot of things that are still up in the air and unfortunately, these things do do change.
Speaker 1:So when are they going to cut interest rates, todd?
Ciaran O'Brien:I'm glad you asked, because I was never going to let him off the hook, that's.
Todd Coleman:I'll come back to that, yeah it'll change frequently between now and when it does happen. But look, you've only got to look back to Philip Lowe when he made that. You know the bold prediction that interest rates would wouldn't change. And unfortunately they did. And that's the problem is that economic information will flow through and that will change things. So if I knew when the interest rates were going to change, I'd be a very rich man, yeah so all four retail banks are predicting a rate cut in February.
Speaker 1:I think that's kind of interesting, or really interesting from the degree that they know what the consumer's tolerance is, if you like. And then the money markets, probably due to the government spending in the economy and the immigration policy, have taken the view that, due to more macro issues, inflation will stay higher. So the retail banks and the money markets are seeing something slightly different, aren't they?
Todd Coleman:Yeah, exactly right. And if you look at you mentioned with the inflation figures, the other important thing is some of that government spending has helped to reduce that that inflation figure. So if you look at the core figure, it's still up above three percent. How long will that take to come through? You know, I guess that's the thing they're sort of really hoping that it will not get pushed up through that christmas period and come the beginning of next year when the rba meet they can have some certainty around that inflation is within the band that's contained.
Ciaran O'Brien:Yeah, We've spoken about a lot of things, todd, and you've given some good insights. One of the things that you touched on just earlier was the rise in your experience of first-time buyers coming to market at the moment or looking to get lending. One of the things I'd really like to get out of this episode is, I guess, a bit of an abbreviated without giving away trade secrets or the need to come and see you but an abbreviated sense of what are some steps that first-time buyers can take to just get themselves into the process more efficiently. I guess and drawing back very briefly onto a point you made about people paying the rent and getting a deposit together, if you can give any insight because I know this is a popular question or it's a common bemoanment of people in the market is are there lenders out there that are actually taking into consideration people's rental capacity as a measure of ability to service any lending?
Todd Coleman:I'll go to the second question first because, yes, they do, as a measure of ability to service any lending. I'll go to the second question first because, yes, they do. So the rent obviously is going to cease once somebody does get into their new property, so therefore, that does come back and include as an input into their income and will help service the loan. As far as what sort of things should people be looking at to do when they are starting to look for a property, is one start early, so start to look at your spending patterns. Banks will want to look at what people are spending, whether it's asking for statements or that sort of thing, but there is still a process that they will go through and look at how much people are spending. So start to review that.
Todd Coleman:Often when I do sit with people and I say, well, how much are you spending? I might say $2,000 a month, and you go and look at the statements and you go do you know you spend $2,000 a month just on Uber? And they're like, oh yeah. So it's actually a good process for people to start to understand what they are actually spending and then what they can afford to live on. Some of the other things will be starting to get a savings plan and start to actually be having regular amounts going in on a fortnightly, weekly, monthly basis, so that that's starting to increase over time. And it's not always just going to be a ring me on Monday, go to auction on Saturday. Sometimes I've had people where I've spent two years with because it's just getting them through understanding what the serviceability is starting to look for properties, starting to get a savings plan, starting to talk to family about family guarantees and those sorts of things. So it's not always just going to be start now and buy a property next week.
Ciaran O'Brien:Is there a? It's a hard question, but is there an average kind of timeframe you would advise? If someone's listening today saying you know what we think we're ready, how much lead time would you recommend? Is there kind of minimum just to make sure they're all squared away come purchase day?
Todd Coleman:Look, if people have been starting to get some of those things in place, and they've got good income and good serviceability and they have been watching their spending, there's no reason why it shouldn't be a matter of weeks, a month. People can do it in that sort of timeframe. If the other really important thing, though and you guys would sort of see this more than I would but what does the person actually want in their new property? Um, and having that list of of what, uh, what sort of things they have to have in a property and what are their needs and wants, I guess, in that property as well is there in your experience?
Ciaran O'Brien:so for first-time buyers, because we obviously see trends in the market in terms of not only what types of buyers are around, but particularly what in property is doing well at any given time. You know talking about things that they're looking for Is there a difference in appetite amongst the lenders based on the types of property that these people are looking for or is it like purely based on value?
Todd Coleman:you know valuation it's still pretty much valuation. There's look, small properties. You know that you're under 40 square meters. Um, obviously, that's a harder one to get across. There are a few lenders that will look at them, but, um, it's, it's a bit harder to get through because, you know, if I look at a normal situation two bedroom, 80 square metres, that sort of thing and it's yeah, 35 lenders I can look at, whereas 40 square metres you might be down to like three or four lenders. So just maybe not going to get as good a deal.
Ciaran O'Brien:This one might be a hard question for you but drawing back to the situation we have where some of these lenders are coming that aren't you know, as you say, you've got 35 that you have access to and we're used to in australia, you know, arbitrarily for big banks that we borrow from thinking very, I say very far back, but not that far ago, to the gsc, for example, and all the issues the american banks faced with their you know, not that we're in the same situation at all, but can consumers here in Australia feel comfortable or can they feel assured that these newer lenders that aren't well established necessarily in our market have the same backups and protections in the event that something does go wrong in the market?
Todd Coleman:If I look at that panel of 35, they're not all banks. Some are non-bank lenders as well, so that's an important distinction. But a bank, whether it's a Big Four or whether it's an ABC bank, are all regulated under the same regulations from APRA. They all have the same bank guarantee from a government perspective. So a bank is a bank. A government perspective, so a bank is a bank. The non-bank lenders will have similar processes in place, but they don't have that same regulatory backing that the banks do.
Ciaran O'Brien:Okay, so there is still some risk there. Look, really great discussion today, todd. I know myself and Peter are very thankful that you've come on in. It is a complex topic. Lending. It's something that we understand at a cursory level but certainly don't understand as experts like yourself. If anyone is listening and does need some support, what's the best way for people to get in touch with you?
Todd Coleman:check out my website, which is just look at mortgage choice, todd Coleman, whether it come through you guys, if they're looking for properties. But yeah, just check the website.
Ciaran O'Brien:Perfect, and I'll put Todd's details in the description for the episode today, so if anyone does want to reach out, they certainly can. Once again, todd, really really great discussion. Thanks so much for coming in. Thank you, thanks very much, todd, and thanks to everyone for listening to Current Market Insights. We look forward to speaking with you next time.
Speaker 2:Thanks for joining us on the Current Market Insights podcast brought to you by Harris Partners Real Estate, the podcast providing real estate insights you won't find anywhere else.
