The certainty of interest rate rises has been discussed in the media for years, so as unpleasant as it may be for borrowers and pleasing as it may be savers, it should not be a surprise.
So what can be done about it after I have borrowed. Lenders have been encouraged to ensure before approving a loan, that the borrowers could easily cope with a possible rise in interest rates. On top of that bankers have been skilled for hundreds of years in assessing the ability of borrowers to service and repay loans. So borrowers would be entitled to expect that the bankers carefully examine how easy it would be for them to cope with an interest rate rise. If the bank felt that they could not do so it would surely have not offered them the loan.
If the interest rate causes some borrowers to worry that they may not be able to cope with their loan in the event of further rises, they should immediately develop a plan for how they can cope with the debt. If they don’t they stand a chance of defaulting on the loan and losing the security property as well as any payments they have already made. The best solution to a current lender increasing the loan cost significantly, is to move to a new lender who is more likely to offer attractive terms in order to lure new borrowers into its client base. Of course any new lender will look at the credit record of the person approaching it for refinance. Therefore a borrower contemplating a future change in lender should make a very determined effort to keep payments with the current lender right up-to-date and if possible get one or two payments ahead. If they can do that for perhaps a year they should be in a far better position to negotiate a lower cost loan with a new lender at the end of that year.
This is not a time for knee-jerk reactions in response to a very small increase in the interest rate. This is a time for long-term planning and that applies whether the loan is for a home purchase, a business or a farm.
LIAR LOANS and DEBT TRAPS
Today’s media carries a large story which claims that a significant number of borrowers have told lies in their loan applications. However the head of ANZ counters with a claim that bankers are required to verify the information provided in support of loan applications. There is a big difference between telling a blatant lie like “I earn $100,000 year” when in fact I earn $50,000 a year. But finance is not everyone’s cup of tea. Many people are highly skilled at their trade, profession or job but are not in any way skilled in matters of money. So it is very easy for them to make mistakes. For instance when asked how much money they spend weekly on any particular group of expenses, many would have absolutely no idea. They simply take a guess at what it might be and that guess can be a long way out. The bankers however have access to massive amounts of data on what people in each pay bracket and suburb and age are likely on average to earn. They have teams of experts in finance and access to well tested computer software for analysing loan application data and situations where defaults occur. So when people talk about “liar loans” it is more likely that the borrowers simply did not know the correct answer and either made their best guess or just said anything in order to not ignorant.
What is far more likely is that bankers and their brokers are deliberately lending money to people who simply cannot afford the amount that they are borrowing or are so close to the wind that the slightest increase in interest rate would financially stress them. This is quite a common practice with moneylenders including Australia’s banks and it is a very profitable.
Many readers may have read the comment by Mr Ken Henry, former Treasury Secretary and chairman of NAB, who said that “the only responsibility businesses should have is to maximize profit.”
The debt trap helps banks maximize profit, because it locks borrowers in and allows debts to be increased by unpaid interest, which allows penalty interest to be charged and makes the interest and debt grow even faster.
The implication of what Mr Henry said is very important for borrowers to understand. It is up to them, not the bank, to make sure that they are treated fairly. Many people treated badly by the bank or a lender tend to go to Afca, the Australian Financial Complaints Authority in the hope of receiving justice. The fact that Afca is owned by the banking and finance industry, should indicate to those concerned about their bank debts that they are unlikely to get very much help from Afca.
Robo-advice, you’ve got to be kidding!!
When banks were deregulated I converted my Chartered Accountancy practice into a banking consultancy GBAC. That was over 30 years ago and in that time we have assisted borrowers all over Australia to obtain better loans, increase their earnings to better service their loans, to have banks compensate them financially for mistreatment and negligence and to enable them to get refinance or original loans by making banks compete with one another for the business, so that the borrower gets the best deal.
For businesses to obtain the best competitive loan we have provided a Business Loan App to attract a number of banks to put forward what they can offer by way of affordable and suitable loans. Then the borrower can choose the best. Having the best banker available as well as a loan that is suited to the business, is one of the ways for businesses to thrive.
Being myself a 4th generation farmer, familiar with the various unique factors that influence farming profitability, we also provide a Farm Loan App so that farmers will obtain suitable loans instead of the very inappropriate ones they frequently end up with. From all over Australia farmers bring their loan problems to us for suitable solutions. We have some unique tools to give farmers a fair go.
As soon as banks were deregulated in 1987 it became apparent that they would put ultra-high profits way ahead of service to customers. However we have seen that those who come through the GBAC borrowing facilities put their own profits ahead of the bank’s. Many banks use computers to assess customers for loan. It is no wonder their customers get treated so badly. Whilst my firm has been computerised since 1972 I can assure readers that in GBAC we give a personal service and do not in any way adopt the modern virtual robot trend, to deal with our clients.
If you don’t want to be accused of obtaining a “liar loan” or to be caught in a “debt trap” from which you cannot escape, please give GBAC a ring and join our long line of satisfied clients who are profiting from their loans, rather than simply boosting bank profits and their CEOs’ multi-million dollar pay packets.
Today’s media also carried a large story based on a UNSW study devoted to the number of people living in certain areas who are said to be under increasing debt stress. The article did not define debt stress. Anyone feeling unable to cope with the level of stress that they find themselves under should seek helpful solutions.
Financial counsellors can be very good at helping stressed borrowers to plan their way out of stress and getting the bank to back off a bit. However, it is important to know that they are partly funded by the banks, so if the bank has caused more serious grief, cheated or defrauded the borrower of large sums of money, the counsellors are unlikely to be able to help. GBAC really began on referrals from Rural Financial Counsellors who could not go past a certain point in helping borrowers. We, on the other hand, are happy to help borrowers recover what has been stolen from them by bankers in the scale discovered by the Banking Royal Commission. We are quick to report delinquent bankers to Federal Parliament with a suggestion that the banking licence of that lender should be cancelled.
The earlier that stress can be dealt with the better. Anyone borrowing who does not have very substantial income and liquid assets is well advised to make debt reduction the first priority in their lives. When my wife and I bought a house after years of searching to find anything that was affordable, we eventually found what we wanted at our price. Then, with no money of our own, but $1,000 from the government managed to borrow 95% with housing loan insurance. We stopped going out anywhere that cost. No coffee shops, movies, restaurants, take-away or holidays were on our agenda for the first 5 years. Our furniture was all second hand gifted. The car was second hand, small and oldish. It was tight, but we had a home. It is a reasonable model to consider because we learned to live light and eventually our income rose and the repayments became easier.
It was really forced saving. In our first 3 years of marriage we rented and saved nothing. From then on we saved hard in home repayments which gave us a roof over our head and potential superannuation that was completely under our control and not subject to substantial management fees.
If borrowers come to us stressed over a home, business or farm loan, we suggest that we do our research on their finances, then calm the lender down with assurances that can be met. That gives us time to refinance the borrowers through our loan apps with the very cheapest and best loans available and suitable to those borrowers. Unlike mortgage brokers, we do not take any commission. We generally persuade the new bank to give the borrowers a fee reduction from the money not paid in broker’s commission.
If a borrower just ignores a bank’s plea to get a loan back in order, that annoys the bank and it gets madder and madder the longer the default continues. At that stage the good relationship has broken and it will never be repaired. Nobody can afford to have a large loan with a lender who dislikes them. It can cost the borrower dearly. Once problems arise, deal with them, then once they are sorted out move to another bank that will have no memory of any disputes.
At GBAC we do not handle a large volume of borrowers. We just work hard to look after the ones who come to us. We are happy to invest substantial time and effort into each person, because borrowing is dangerous and we do not believe that is fair for banks to bully borrowers as they so often do.
Most banks are good if the borrowers follow the loan terms to the letter. The problem is that most borrowers do not even read or understand those loan terms. When we help anyone borrow we work through the loan terms with them to ensure they are happy with them. If not, we ask the bank to delete the offending clauses. Mostly they will if it is fair to them too.
Remember that a MORTgage is literally a “death pledge”. The lender is deadly serious about getting the money back in the agreed time frame and being paid interest on time too. Talk to them or us if there is a problem. Talking takes the heat out of dangerous loan situations.