We have settled over $1.5 billion in mortgages over the past 15 years (it’s our anniversary this month). Over this time, we have had less than a handful of clients go into arrears (i.e. late payments) and none default on their mortgage(s). Our clients represent an excellent credit risk to the banks.
Given this, we are closely monitoring the introduction of positive credit data reporting. This will eventually help banks offer tailored, risk-based pricing i.e. lower interest rates for low-risk customers. Given our client base consists mainly of lower-risk, professionals, we will be proactively seeking out such opportunities on behalf of our clients.
What is positive credit data?
Prior to March 2014, Australian credit reporting agencies only recorded negative information about borrowers such as defaulting on a loan. Other than negative information such as this, credit reports provided very little information to help banks assess whether a borrower represented a good or bad risk.
Credit agencies can now record positive information such as whether you have made all loan repayments on time, what credit contracts you have successfully repaid in full and so on. This information paints a better picture of your credit worthiness. Of course, this is only as useful as the information being provided so the government has mandated that the banks must supply all positive data by 1 July 2018.
You can view an example of someone’s credit file here to see an example of what is recorded. If you would like to view your own credit file, you can request a free copy of your file from one of four credit reporting agencies – contact details are available on this page (half way down).
What is risk-based pricing?
In the USA, your credit score determines what mortgage interest rate a lender offers you. If you are a lower-risk borrower, you will be offered a lower interest rate.
Australian banks have recently started to offer some level of risk-based pricing. Many lenders now charge a higher interest rate to people with less equity (i.e. LVR’s over 80%). However, with the influx of this new credit data, Australian banks will have the tools to be able to offer risk-based pricing to their customers. Banks will be able to provide us with pricing tools that will customise the interest rate offer for each individual borrower – doing away with off-the-shelf, one-size-fits-all pricing.
How can you (we) take advantage of this?
Of course, the best thing you can do is maintain an unblemished credit record. Be careful to not make too many credit enquiries with a lot of lenders. With the increased risk of identity fraud, consider paying for a ‘credit alert’ service such as this one so that you receive a notification when your credit file is changed.
When banks start offering risk-based pricing it is likely they will do it on a pilot/selective basis. A firm like ours will be perfect for the banks to test a customised pricing model on. In fact, because the lenders know that we have a niche, professional client base, we already get approached by lenders a couple of times a year to offer special deals to our clients. For these reasons, I think our clients are very well-positioned to take full advantage of risk-based pricing when its launched in the future. Rest assured, we will be proactively seeking it out to source lower interest rates for our (lower-risk) clients.