Rising interest rates changing how property deals are made

Rising interest rates have changed more than our bank balance, they’ve changed how we transact, how we negotiate and how real estate agents navigate a property sale.

The Reserve Bank cash rate moves in 2021 came as a shock to many. RBA Governor Philip Lowe’s earlier assurances that Australians wouldn’t face interest rate increases until at least 2024, the impact of the rate hikes have rattled more than just property buyers and mortgage holders.

Gone are the heady days of 2021, with multiple property purchase offers flying around, aggressive auction bidding and properties’ days on market at all-time lows.

Whenever the first Tuesday of the month delivers unwelcome RBA news brings, with it comes a wave of panicked buyers, all leaning on their mortgage brokers and banks for an update on their latest adjusted borrowing capacity.

The timeframe for each lender to apply the interest rate increase and to share their adjusted borrowing capacity calculator varies between banks. Some manage the updates almost immediately, while others can take days or weeks.

The challenges span further than just an increased interest rate repayment calculation. In the face of rising inflation, our lenders have also applied an increase to the HEMS index (household expenditure measure).

This has compounded the impact of reduced borrowing capacity for many, and the HEMS changes haven’t all consistently rolled out among lenders, either.

Opaque lending rules

Visibility into borrowing capacity is limited for many and this is proving difficult for those who are pushing their buying power to the edge of their capacity.

While some buyers manage to clarify their recut borrowing capacity, plenty don’t. They attend the ‘open for inspections’ with a blurry grasp of a reduced upper limit, only to find out a few weeks’ later, yet another rate increase has been announced.

For the few who do have an up-to-the-minute idea of their constraints, they may feel inclined to press ahead to auction and bid unconditionally to their limit. However, most either opt out of unconditional bidding or offer process, or they apply a significantly reduced limit to their bidding in an effort to buffer their risk.

After all, the risk of overshooting a budget is significant. An unconditional offer translates into potential financial losses if funding cannot be secured.

Auction bidding requires a committed buyer who is comfortable to put their 10 per cent deposit at risk, as does an unconditional cash offer on a private sale contract.

Agents and vendors are aware of this and they’ve seen lower auction participation rates, significantly increased finance clause usage, longer days on market, and overall reduced auction clearance rates.

Expressions of interest

Properties are selling though, albeit a bit differently.

In our auction capitals, agents have reverted a reasonable percentage of their listings from a typical auction campaign to some form of private sale.  

“Expressions of interest” have become a popular format for many, with a closeout date giving the vendor a sense of an end date, much like an auction campaign enables.

The difference between the two, however, comes down to conditional offers and finance clauses.

An “expression of interest” format enables the agent and vendor to field a breadth of offers with their respective associated conditions. While no vendors get excited at the prospect of a conditional offer, in this climate it’s generally to their advantage to entertain conditions.

It's better for a vendor to attract multiple conditional offers than to experience an auction that passes in on a vendor bid.

The benefit of an “expression of interest” campaign is that the vendor has the luxury of selecting the offer that holds the most appeal to them and their circumstances.

I’ve experienced plenty of situations where the vendor has accepted a lower, unconditional offer, or a lower, shorter-settlement offer. As opposed to an auction, which assumes the property sells to the highest bidder (regardless of agreed terms), an “expression of interest” campaign allows the vendor to apply discretion and select the set of terms and offer that suits their needs.

Buyers who are applying finance clauses to their offers aren’t all categorised the same. Some lenders require longer tenures for the clause due to their approval timelines, while others have a fast turnaround.

In addition, agents and vendors are applying scrutiny to the loan to value ratios (LVRs) on each offer in an attempt to understand how much risk is represented by each buyer.

“Will this sale proceed?”, “Will I have to re-market my property in tougher months?”, and “Should I take the lower offer with less risk?” are just some of the questions that many vendors face.

Confidence is king for property buyers

If buyers wish to give themselves the best chance of buying well in this rising interest rate climate, maintaining clear dialogue with their broker or lender is a great first step.

Taking a serious risk with an unconditional offer is not for the feint-hearted. Noting when the RBA meets, when rates move, and what lending constraints are applied to their borrowing capacity may give a buyer the impetus to put forward a stronger set of conditions, or maybe even an unconditional offer.

With the finance challenges most buyers are facing right now, confident, unconditional buyers have a significant edge over their competition.