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Banks are punishing the most vulnerable

There’s more bad news for homeowners. Interest rates are up again, with promises of more to come as central banks around the world play follow the leader. The effect on inflation is anybody’s guess. Much of our inflation is entrenched - think the building industry - and many parts of household spending being non-discretionary. The rise in variable reference rates facing borrowers who come off low fixed rates is frightening.

The latest rise drew the predictable headlines, but once again, a major factor has been glossed over in the reporting. That is the way the big institutions have a feeding frenzy the moment people become vulnerable or get into trouble.

Think about a typical family who are doing their utmost to keep their finances in order. They are battling to cope with quickly rising prices on most things they need, along with multiple increases to their home loan repayments. Even with the best of intentions, they may easily fall behind in either or both their home loan repayments, and credit card repayments.

Even though banks spend a fortune on advertisements trumpeting that they wish to assist customers in financial trouble, the reality is entirely different.

Raising rates on overdue loan amounts

Many banks have a policy of moving home loans to a ‘default interest rate’ once borrowers are in arrears with payments. This means banks raise the interest on the overdue amount of a home loan purely because customers are having trouble making the payments.

But if they can’t make the payments at normal interest rates, how can they possibly make them when the interest rate has been raised? It’s not rocket science – this is kicking borrowers when they are down.

In fact, most banks outline their policies on raising rates on loan shortfalls (see below), and though these shortfalls may be small at first, they can quickly compound with variable rates of 7-8%.


Source: CBA's Consumer Mortgage Lending Products Terms and Conditions, effective 15 December 2022


Source: ANZ's Home Loan Terms and Conditions


Source: The Loan Saver Network

Credit card practices are unfair

Then there are credit cards. If the outstanding balance is not paid in full before the due date, the interest rate skyrockets to around 22%, backdated to when the goods were purchased. The interest-free period is removed. It gets worse, and relying on credit cards is a dangerous path. The borrower's credit rating will be shot, and it will become virtually impossible to switch a credit card to a cheaper provider. People will be stuck with an increasing debt at 22% and little chance of getting out of it.

This has been going on for years, and I’ve yet to meet any politicians who are willing to take on this predatory practice. Surely, it’s a matter of fairness.

The impact of rising rates and mortgage insurance

It’s not easy for people who are trying to protect their financial position. Think about a couple who shopped around for the lowest possible rate of interest on their home loan a year ago, before prices started to fall. If their deposit was less than 20%, they would have needed mortgage insurance – an expensive product with the sole purpose of protecting the lender, in the event of default by the borrower. That’s correct: the borrower insures the lender, for the privilege of borrowing money! A fundamental problem is that mortgage insurance is offered by only a few specialist companies and is not transferable.

A borrower who has a loan with Bank A, and decides to change banks, will discover that a new mortgage - with the same borrower, same mortgage insurer, over the same security - will require them to pay a second premium, to insure their new lender, Bank B. And the cost of that second premium would normally be enough to make the shift uneconomic. They are locked in.

But there’s more. This year, many homeowners will see their fixed loan rates expire and be faced with paying a much higher rate. Their deposit may have been sufficient to avoid mortgage insurance when they bought the house, but if the home’s value has fallen due to interest rate rises forcing prices down, they may find that their deposit is now under the 20%. They are now locked into the existing lender.

Mortgage brokers tell me their existing bank will probably renew the loan if the borrowers are prepared to cop whatever interest rate the bank offers them. However, if they wish to change banks to get a cheaper rate, there will be the expense of a valuation, and then mortgage insurance, if the loan is approved. Once again, their only viable option would be to stay with their existing bank and cop whatever terms that bank decides to put on them.

The combination of rising prices due to inflation, and rising interest rates – which may be well be a futile mechanism to reduce inflation – mean that many families will be under extreme pressure. It’s hard to think of any action more reprehensible than punishing them further with default loan rates and high credit card rates.

 

Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au

 

30 Comments
Chris
May 30, 2023

People aren’t suffering THAT badly; go and take a look at the pubs, restaurants, clubs, football matches and the airports…still FULL of people. Try getting an overseas flight to Europe in the next two months, there’s no seats (especially not rewards seats) available and if there is, the prices are ridiculous; $4,400 with SQ LHR-Australia.

People are making a lot of noise about being poor and having no money but the reality of normal life is very different from those indicators above…

Louise
March 10, 2023

I am from the silent generation and lived in the Great Depression and find many of these comments interesting. Where has all the fighting spirit of Australians gone and why do people whine so much.

Gus
February 22, 2023

From articles I have read there are about 1m houses that are unoccupied as the owners are using it to land bank and take advantage of negative gearing and capital gains concessions. If most people are hurting look closely in the mirror and you will see the answer starting back at you. Stop electing politicians that don’t give a damn about you or are only interested in short term policies to keep them in power which you gladly oblige very 3 years. Australia has a very real problem with ethics and morals. The number of Royal Commissions is the proof. We don’t have lessons learned just ignored to gain a profit. When you start answering moral dilemmas with “is this the right thing to do” rather than “ what’s the chance of me getting caught” then as a society we can move forward. Until then, keep looking in the mirror and forking out to big banks and maybe you will vote for someone different. I was glad to see so many independents getting in. We need more so major parties do not have majorities. Art of politics is negotiation. Let them earn their publicity funded salaries.

Declan Thomas
April 13, 2023

You cant negative gear an unrented investment property, so not sure your comment stacks up mate.

SS
February 22, 2023

Maybe APRA should come into this discussion? APRA relaxed the lending requirements, and there never a mention about this.

Jason
February 21, 2023

There have been some good summaries around on what has happened since the GFC. Basically, governments including Australia have been winding back safety nets whilst opening up their populations to free market globalised forces . Generally this has lead to cheaper goods and services but also reduced purchasing power for many except the top 10 percent of wage earners. In compensation for this interest rates have been kept negative real and low to help average households feel richer. Governments have also allowed banks to relax lending standards so people not only use their equity as an emergency fund but also use it to live beyond there means and buy discretionary items which has juiced the economy.

One of the problems is that globalisation and low debt levels have hobbled low and middle income earners with low assets (eg inheritance) who now have less disposable income due to the sheer costs of rent and or mortgages.

This strategy has popped as banks have no choice from now on but to raise rates and keep them high to control inflation.

Some are hoping that the central banks will simply give up and let inflation run loose. However inflation is terrible for low and middle income earners (most of us) with few assets and or high debt levels. Inflationism was actually a movement way back when that was propagated by wealthy landowners etc in England during recession cycles as it generally got them richer at the expense of everyone else.

As Cathie Woods suggests there will be a deflation problem in future due to AI. Debtors can rejoice about that but of course it is likely to make the income Bell curve even more extreme. Can't win.

I also noticed that there are 40 year mortgages available in response to rising interest rates Why not 50 or 60 years? This should be outlawed because banks are effectively presuming that they can take your super down the track in the event of forced retirement. Loans should be 25 years max.

Mark Hayden
February 20, 2023

Well said Noel. It is good to hear someone standing up for the Aussie battler. Penalty interest rates are not a logical solution to the problems of inflationary times. I hope you encourage more people to stand alongside you in this cause.

asdf
February 20, 2023

Facts:
1. Reserve banks have only 1 lever to pull to control inflation (mission statement) . Interest rates.
2. Elected governments bribe their way into power i.e. Budget deficits ( call it what you like - NDIS, green spending etc)
When you spend too much ( deficits ) and add to inflation what do you think the RBA is going to do ??

if you want the RBA to do something different then it has to have different tools and levers.

Muz
February 20, 2023

Mortgage holders who have had low interest rates for the last 10 years should be well ahead on their repayments and be able to cope with these rising rates. The ones who should be now benefiting from rising interest rates are the savers who have been suffering with low interest rates over the last 10 years but unfortunately the banks are not passing on the full rate rises to depositers. The government & media should be applying pressure to the banks about this instead of hammering RBA Dr Lowe about raising rates to combat the inflation the government contributed to by all these free money handouts.

Allan
February 20, 2023

Noel Whittaker says: "[...] *That* is the way the big institutions have a feeding frenzy the moment people become vulnerable or get into trouble. [...]"

In the interests of 'temporal deixis', I'd much rather that Noel had prefaced his second paragraph's finale with *This*, simply because, with it being succinctly said 'time and again' that, "Time is money", *This* is much closer to home and of course (t)extant than *That*, which rates as far too retiring for my liking.

Given that Philip Lowe's name has been given a fair towelling for some time now, I believe that we should dispense with using "the banks" and "big institutions" and instead drastically, drill down descriptively in mentioning the names of all the moolah-managerial who might then lose 'interest' somewhat knowing that there's many painfully paying out on them as they're all put on notice. I did so like the ABC's photo of Royal Commissioner into Banking, Kenneth Hayne and former treasurer, Josh Frydenberg sitting across from each other and Mr Hayne not seeming eager to shake Mr Frydenberg's hand. A grand picture's worth a thousand words.

David
February 19, 2023

When an un-elected institution like the Reserve Bank is allowed to make decisions and suffers no penalty for getting it wrong, then our society deserves everything its gets. One of the greatest problems confronting Australia's future is the low birth rate, where we are not having enough children to replace ourselves. High costs of home formation, leads to young couples putting off having children till its either too late or they learn to live without them. The jacking up of interest rate by the Reserve Bank's only tool to combat inflation is too crude. It dis-proportionally affects young families. Children are expensive, but the nation should not actively prevent them being born. Getting more people by immigration, by plundering the best and brightest of third world countries, who have paid for their expensive education is morally dubious.

Geoff
February 19, 2023

You're convinced they've "got it wrong" are you? I'd say it's too early to call. And they're independent because if you leave such power with elected governments they will possibly not act when they need to because it would be unpopular to do so. What other solutions have you got?

David
February 22, 2023

If you believe that by just doing what other reserve banks have done around the world, it is hard to criticise ours. But they have all made a complete mess of it. In hindsight, leaving cash rates fixed at 2.5% for the last 10 years would have been a much better strategy. That way, house prices (which the reserve bank claims have nothing to do with them), would not have skyrocketed when interest rates were too low, and then not have fallen so much as they were raised to fight the inevitable inflation, leaving home buyers now with negative equity and impossible mortgage payments. Why cannot interest rates just be set by the market?

Pffft
February 19, 2023

The biggest problem I have with all this is the generation that got rich off zero interest rates and debt while savers were utterly destroyed by this useless greedy factional reserve banking system that is built solely on debt to keep power. Meanwhile the land and housing market had all the tax benefits gifts from governments non stop to prop it up for votes and now the very people saying in here from their glass towers who abused this system are saying "to bad so sad if you can't repay your loan" = translated to "I made my money from cheap debt because I'm so smart (no you're not you just got lucky at the time you born) and everyone else can get stuffed because I've got mine" = hypocrites of the highest order. 

Johnathan
February 19, 2023

It is essential that people who have overextended themselves seek advice and support to manage their debt effectively. This may include working with a financial counsellor or seeking out financial education programs. It is also crucial for lenders to act responsibly and ensure that they are not offering loans that are beyond the means of their customers. It is important to recognise that rising interest rates will have a significant impact on many people, and steps need to be taken to mitigate the potential negative consequences. By taking a proactive approach to managing debt and promoting responsible lending practices, we can work towards a more stable and sustainable financial future for all.

Keith Ralph
February 19, 2023

When you sign a contract to borrow money, you are bound to the contract.
If you default on the contract it is not the banks fault, they own the money in the first place so you give it back
or abide with the contract.

Dan
February 19, 2023

Don’t take their money if you don’t agree to their terms.

CW
February 17, 2023

My experience as a broker was default interest was only invoked when a borrower refused to enter into meaningful negotiation to resolve the problem. Certainly when default notices are issued they will include default interest. However, borrower’s flexibility is driven by LVR’s. A borrower has limited options when in arrears with a high LVR. – hence better to call it early if no likelihood of situation improving (eg with new employment, help from friends or family) rather then let it deteriorate further.



Andrew Booth
February 17, 2023

According to CBA's Financial Report for the 6 months ended December 31 2022, their Net Interest Margin was 2.10%. For the six months ended December 2021 their Net Interest Margin was 1.92%. They have clearly been successful in raising their rates to borrowers more than it has cost them.

Aussie HIFIRE
February 16, 2023

“Fair” is a word that can mean almost whatever you want.

You might think it’s not “fair” that a borrower who has already shown that they can’t pay back the loan gets charged a higher rate of interest, the lender may think that their loan has now become a lot riskier and therefore it’s “fair” to charge a higher interest rate to reflect that higher risk.

You might think it’s not “fair” to charge a higher interest rate on an unsecured loan which is what credit card debt is, the lender may say that this is much riskier debt than a secured loan AND you’ve already gone through the interest free grace period and not paid back all your loan, therefore it’s “fair” to charge a high interest rate to reflect the risk.

And whilst as a borrower you might think it’s not “fair” to have to pay LMI again if you are refinancing your loan for whatever reason, the lender may think that it’s not their fault that the value of your house has fallen or you weren’t under the 80% LVR at any time and it’s “fair” that they charge whatever it’s costs to protect themselves.

Pick whichever meaning of the word “fair” that you want.

John C
February 19, 2023

It's interesting...perhaps someone here could provide the info...but I've understood, perhaps incorrectly, that with the bank invoking it's insurance, which has been paid for by the borrower, subsequently the insurer then goes after the homeowner to recover the amount paid out to the bank. If that's so how do you explain that as being fair.

John
February 20, 2023

Absolutely. The banks/brokers organising the funding should have been upfront enough to warn borrowers that “the writing was on the wall” that interest rates were a long way from normal and that they should prepare to accommodate increased rates. Then borrowers were going in with both eyes open!

Jake
February 16, 2023

OK, I am going to be the dissenting voice here. Why shouldn't banks charged penalties such as higher rates on arrears amounts on people who don't make repayments on time? Given a borrower is at greater risk of default given the late payments, why shouldn't banks charge higher rates to reflect that default risk? It is sound business practice. It's not a bank's job to be lenient on those who don't repay loans on time.



Ray
February 16, 2023

Hear hear Jake


For over committed borrowers who blithely ignored the period of"emergency low" interest rated and thought that they had become the new normal, oops, bad luck and your problem. And as for taking a mortgage out with less than 20% deposit? The very fact that lenders require mortgage insurance to cover themselves says it all. You ARE a risky borrower who is likely to default. The data says so. And as for how to handle unusually high interest rates? My wife and I's lender told us not to panic during the eighties 17%+ period. Just pay your normal monthly repayments and we'll work it out later. But this little black duck being sole breadwinner with wife and 2 kids to support kept the extra payments up and worked all the overtime available. Espresso coffee became a Saturday luxury and as for holidays? What are they? Net result is that we owned our first house in under 8 years. Then we had a holiday - a week in exotic Bali no less. Paid for in cash too, when we could afford it. So, banks are not responsible for their clients' financial practices. As for those bleating about high interest rates, just wait till the Cash Rate hits 7-8%. 

Denise
February 20, 2023

Quite right. I live in a cheap little house in an outer suburb. No ducted aircon, media room or pool in the backyard. Whether borrowing for a residence or a rental, understand that the bank is a business [ code - there to make a profit ] . The bank is not your mummy. Don't borrow more than what you can afford, cut the luxuries and the holidays, and get it paid off. I paid my house off, with no help from a spouse, through the 17% interest rate recession that Keating said we all needed. Wait for these milennials to start screeching when rates hit that level.

Jason
February 21, 2023

Oh if I was sensible and only purchased a property from my family on 2x income like you did I would be looking at.a house worth $160k. Obviously not possible. Most families have to take extreme financial risk to buy even a modest property way out west (with high transport costs needing to be factored in).

Btw low to middle income earners are most of the countries working population. Not the unfortunate poor

Allan
February 20, 2023

Your classic "banks charged penalties" (sic) says it all, Jake. Having been charged penalties, and never at large "charged" enough penalties to send them all to the wall forever I might add, the banks are merely trying to claw back what they've lost and much more besides, like Alan Bond did when he was released from prison and then involved himself with 'payday lending'. I wonder if there's still any banks sending out blatant 'blueys' to long-deceased folk daftly-deemed by banks banking on them to be still holding out on coughing up with some readies in a timely fashion? $nake$ alive!

Sue
February 16, 2023

The banks need to be called out on the lies in their advertising. Instead of "we're here to help you" it should be "we're here to help ourselves to all you have and more". Nothing's changed since the late 1980's.
I'm currently working with a family who had more than enough income to cover their loan repayments until the husband suffered a workplace injury a year ago. His employer won't accept his claim for compensation and he's been without any income at all for about four months.
Will his bank treat him with compassion? Not on your sweet Nellie.

mark
February 16, 2023

Credit cards - the banks add annual fees, late fees and overdrawn fees to the balance and then charge interest on these. Surely this is a case of double dipping.
Mark

Argus
February 19, 2023

These fees and charges are attributable to greater risk, and these charges are compensation for the risk assumed by the bank. It is not double dipping but cost recovery by the financial institutions incurred.

 

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