Interest rates are rising but don't be bullied by the banks! It's important that you manage interest rate rises with a repayment strategy, now. The media is full of fury about the impact of rate rises but are you aware that family mortgage stress adds to issues like domestic, family and sexual violence episodes?
NSW Chief Justice Andrew Bell, in an address recently dealing with the increase in domestic violence, said that the courts were anticipating a very significant increase in cases involving banks seeking possession of real estate, a product of extreme mortgage stress.
You may have heard of APRA, the Australian Prudential Regulatory Authority. APRA is a government body tasked with protecting the interests of depositors, insurance customers and super fund members. Note that it is not tasked with protecting the interests of borrowers so don't be fooled into thinking that the government has your back.
The head of APRA says that while the interest rate hikes will “be difficult for some borrowers” the banking industry will be resilient. He said that lenders were in strong financial shape and would weather the threats.
So they should, given the massive profits banks are generating by overcharging customers and underpaying depositors.
These comments suggest a wide-spread belief that rising interest rates are going to cause severe problems for some borrowers. Homebuyers, business owners and farmers are all in the same boat on that. Many have suffered from fire, flood or drought, covid and the price hikes from the Russian invasion of Ukraine.
Spending: Act early and cut hard to manage interest rate rises!
Do everything possible to cut spending in order to manage interest rate rises. Most people cut gradually, hoping that they will not have to cut hard, but bit by bit seeing that they must cut out more spending. The better approach can be to cut out absolutely every bit of spending that can possibly be cut out. That is what I have always done whenever things got tight. It is what I generally recommend to GBAC clients.
By cutting severely and early, it is possible to keep up required repayments without too much stress for a few months. That allows time to develop a long-term strategy. If it becomes obvious that the cuts were not needed then borrowers can relax and some expenditure can be started up again. Acting early works to provide time to build up defences.
It can be disastrous and expensive to wait until a mediation notice, or worse, a court ordered foreclosure sale notice arrives on the doorstep.
It's time to contact your bank to manage interest rate rises
Once a strategy has been developed this is the time for a borrower to contact the bank and chat about the difficult debt, interest rates and possible repayment scenarios, letting the bank know that budgets are being revised to take account of changing circumstances. Through a general friendly chat it may also be possible to find out whether there are cheaper loans available from that bank or whether the bank is thinking of extending the loan terms to keep the repayments close to what they were.
If interest rates have you at a crisis point...
If it looks like new repayments are going to be seriously unaffordable there are a few options..
1. Find cheaper repayments
Hunt around for a new loan with cheaper repayments. If say a person is half-way through a 30-year loan with 15 years to go, they may be able to refinance into another 30-year loan with substantially lower repayments. GBAC's LoanApps are an easy way to obtain good loan offers and frequently better than going through a bank paid broker who is not going to try to screw the bank rates and charges down for a borrower. The broker is looking to a commission from the bank of somewhere around $7,000. GBAC's LoanApps empower borrowers to negotiate hard because there is competition for the business.
Your existing bank might extend the number of years over which the balance can be repaid.
3. Offer a 'balloon' payment
A new loan might be negotiated at the same bank with a “Balloon” payment at the end, which lowers regular repayments.
4. Renegotiate to manage interest rate rises
It may be possible to negotiate a completely new deal if the bank has led a borrower into an inappropriate or unaffordable loan. In some cases the bank can be persuaded to make very generous concessions by GBAC negotiators.
What does “inappropriate” or “unaffordable” mean in bank terms?
It is inappropriate for the bank or a broker to tell a borrower to falsify their figures or expenses. For a farm loan it is inappropriate to ignore the impact of weather, commodity price fluctuations or government policy. For a business it is inappropriate to ignore past business and economic data.
For a home loan in a low interest environment it may be inappropriate for the bank to have power to foreclose and sell the property up when interest rates move up suddenly and that forces the home value and its security value to fall temporarily below the loan balance. Usually the real estate security value will be back up within 5 years to where it was. For a long term loan that is what matters.
A loan is unaffordable from the start when it is obvious from the start that a business has been losing money in each of the three preceding years. A loan can be unaffordable where the bank knows that some circumstance is likely to make the business less profitable than it has been in the past eg death or serious illness of the CEO in a family business, or recent arrival of a large and powerful competitor. It is also unaffordable if in the past few years the business or farm has lost money instead of earning a profit.
Spread the risk to manage interest rate rises
This is the time of greatest risk for borrowers. The lender may decide to cancel the loan and just sell the property, to clear the debt and lend to someone fresh. This is when people seek debt relief. But they can often help themselves to access debt relief by taking the initiative.
Borrowers can start looking around at other banks. If circumstances permit, they might quietly open another account of some kind at a different bank with a small cash deposit. That can provide somewhere else to go to enquire about loan if refinance becomes necessary. If funds are not transferred between those old and new bank accounts, it will not make the current lending bank jealous of the new one enough to do something unhelpful.
That strategy sometimes enables people, particularly business owners and farmers to squirrel away some funds in separate account, in case the lending bank one day freezes all the money in their savings or transaction account. Some people find they cannot even buy food when that happens so it pays to have funds in a few banks if possible. Banks often freeze the account as soon as a large deposit arrives. For businesses counting on the money it often means they cannot even pay wages.
There is a current trend towards offset accounts. That allows a borrower to build up savings account that is offset against the loan when interest is calculated. Few borrowers realise that their loan account probably allows the bank to seize all the money in that savings offset account to reduce the mortgage loan debt at any time the bank feels like it. If that savings account holds a few hundred thousand dollars and the bank seizes it, a borrower can be left high and dry. It is wise to not put all their finances with the one bank.
When borrowing or looking around to refinance, it is worthwhile to put a bit of competition into the market in order to obtain the very best refinance possible.
GBAC’s business loan apps and farm loan apps are a very easy ways to find out what is offering. They will take a brief request for mortgage finance to a number of banks to see what they can offer. It is important to let LoanApps know who the existing loan is with, if there is one, so that no enquiry goes to them. Later the borrower can bargain with the existing bank on the basis of what other banks have offered.
Loan looking is best done slowly and cautiously. All responses from new banks offering to take over the loan should be carefully scrutinised and sample contracts obtained for reading and legal advice. Done slowly it is possible to build up very good relationships with each of the bankers as you manage interest rate rises. Their eyes will have dollars signs in them when they perceive a new customer on the horizon. Loan solutions come in many forms and the most appealing forms will come when they are sought early when they are not urgently needed. The worst time to look is when refinance is urgently needed because of foreclosure or some other disaster.
My mother once observed, “Bankers are people who will sell you a good umbrella at a good price on a fine day. But it is quite a different story when it is raining.”
It is important to understand that each person, business or farm has unique circumstances. One solution does not fit all, because we each have many things happening in our lives and an action in one place can sometimes have unintended consequences in another aspect of our lives. Be prepared to obtain a free preliminary professional assessment of your situation from GBAC that suits your own individual circumstance, before doing any of what I have mentioned above.
If you need help negotiating with your bank, get in contact with GBAC for a friendly chat.