The Emergence of the ‘First Time Rate Risers’ (FiTeRRs)

In RFi’s most recent Mortgages, Credit Cards and Personal Loans surveys at the end of June, we asked borrowers if they were aware of rate rises and whether they knew what impact the rises would have on them personally.

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Across the board, under 35s are far less aware and informed. To quantify, 13 per cent of mortgage borrowers under the age of 35 were unaware of Reserve Bank of Australia rate rises in May and June, compared with 5 per cent of over 35s. And it’s worse among credit cardholders, where 29 per cent of under 35s and just 8 per cent of over 35s are unaware of these rate rises.

“The problem is clear: newer borrowers, with larger balances and little experience of rising interest rates.”

When it comes to the impact, the contrast is also stark. Eighty-one per cent of mortgage borrowers over 35 understand the impact of the rate rises, compared with just 65 per cent of under-35s.

Awareness and Understanding of Impact of Rate Rises

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Source: RFI Global Surveys of Australian Mortgage Borrowers, Personal Loan Borrowers and Credit Cardholders

Careless or burdened?

It’s easy to write this off as younger consumers being naïve and careless with credit. However there is another angle worth considering: the RBA last increased the cash rate 12 years ago, in 2009 and 2010, which means if you’re under the age of 35, there is a very good chance this is the first time you’ve ever seen rates go up while borrowing money. This is particularly true when it comes to home loans.

This issue is compounded by the fact recent borrowers are likely to have larger balances on their personal loans and mortgages. Cars (even second-hand ones) and dwellings are more expensive now than they have ever been.

The ABS data on average owner-occupier home loan size is quite revealing in this regard. It shows since March 2019, the average loan size has increased from $429,000 to almost $610,000. An increase of 42 per cent in the space of three years.

Average loan size for owner-occupied dwellings

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Source: Australian Bureau of Statistics

Can they be helped?

The problem is clear: newer borrowers, with larger balances and little experience of rising interest rates.

Something that RFI’s data has been showing for a while now is when it comes to accepting guidance and tools from a financial institution, younger consumers are more open to the idea. They like the idea of personal financial management (PFM) tools more than older consumers and they are more willing to hear from their bank when it comes to tips on money management.

% of each group that would value the following features as part of a mobile banking app

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Source: RFI Global Survey of Australian Adults

The chart above shows an example, taken from a question RFI asked regarding valuable features of a mobile banking app. On all things PFM-related, the under 35s were significantly more likely to find them valuable.

This is as true for features that enable transparency of purchases – bill tracking, spending insights and searchable transactions – as it is for transparency of overall financial position – credit score tracking and financial health monitoring.

The fact is, under 35s are used to having information at their fingertips and they like to see where they’re going.

What now?

It looks as though we’re entering a period when younger adults are going to need help from their financial institutions. Further, they are a group of individuals who are open to being helped.

There is clearly a role to play in this for banks. These young adults may not know what is coming but they are open to using tools to manage their finances and won’t go down without a fight – I’d like to think of them as First Time Rate Risers or FiTeRRs for short…. (Ok, I took a bit of license there with the acronym)

From a lender’s perspective, it’s going to be crucial to understand what customers will need – flexibility in uncertain times – and what will ultimately help them feel smart about managing their money. A dual-pronged approach along those lines will be a winning formula in ensuring young adults come through the next couple of years with their credit ratings intact.

Alan Shields is Co-Founder and Chief Data Officer at RFI Global

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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