Barefoot Investor: If you’re not paying for the product, you are the product

INTEREST rates are heading higher according to the bloke who sets them, so is now the right time to lock in your interest rate? And 82 per cent of Aussies believe their mortgage broker has their best interests at heart, but the banks are a little more cagey on that.

INTEREST rates are heading higher according to the bloke who sets them, so is now the right time to lock in your interest rate?

And 82 per cent of Aussies believe their mortgage broker has their best interests at heart, but the banks were a little more cagey on that at the recent Banking Royal Commission.

IS NOW THE TIME TO LOCK IN INTEREST RATES?

TAM AND CHRIS ASK: My wife and I sat down with a mortgage broker, who suggested we refinance to a fixed-rate loan. The difference between fixed and variable is negligible ‒ around 0.10 per cent on a three-year term (no offset, though) ‒ but, with all the talk of the US Federal Reserve lifting rates, is the smart money fixing at these record low rates? What would you do?

BAREFOOT REPLIES: You’re right ‒ interest rates are heading higher (not yet, but it will happen).

Well, that’s according to the bloke who actually sets our interest rates, Reserve Bank Governor Philip Lowe. He made headlines this week when he said that not only will the next interest rate move be up but Aussies will be ‘shocked’ when it eventually happens.

Personally, I think the Guv is having his ‘seven-year itch’ ‒ given that’s how long it’s been since rates have increased in Australia.

Borrowers are basically behaving like a husband who’s spent his entire marriage drinking tinnies on the couch and waiting for the missus to deliver his dinner. And then he’s totally shocked when she gets jack of it and tells him “it’s over”. “Where the hell did that come from?!”, he says, bewildered.

Anyway, you guys are doing something very un-Australian: thinking ahead. Good on you.

However, I personally wouldn’t fix my rate, even on the slight differential that you spoke about.

Why? Because I don’t know when rates will increase, and neither does the Governor.

And because fixing your rate locks you in, and restricts the amount you can repay. (Also, in your case, there’s no offset account on the product you’re suggesting. Some fixed loans do offer this, but they charge more for it.) It also restricts your ability to refinance during the fixed term, should interest rates or your circumstances change (and it also locks in the broker’s trailing commission).

So, unless things are really tight, I’d suggest putting your energy into getting the cheapest variable rate loan you can, and using the lowest rates in history to knock a huge chunk of debt off your home loan.

Sometimes a prenup can be a good idea.

MILLIONAIRE WANTS A HUBBY

NIKKI ASKS: I’m a lady who, at age 49, is contemplating marriage in the near future. I earn $100,000 a year and am worth several million ‒ my partner much, much less.

I know marriage is not just about money, as we both have skills and qualities that make us a strong team. But isn’t it wise that I protect my assets with a financial agreement before marriage?

Thank you for your book ‒ I have applied its advice, but maybe a future edition update could provide some guidance on this?

BAREFOOT REPLIES: I went looking back through my book and couldn’t find anything in it about prenuptial agreements (or ‘binding financial agreements’ as they’re also known).

Still, it’s true that I have said previously that I chose not to have a prenup with my wife. However, that’s because we came to the relationship relatively equal (financially), and knew we’d have a family. So in our case there wasn’t a need for an agreement.

Even better, my wife is the smartest person I know, and there’s a direct correlation between our marriage and my increasing earnings!

In your situation, I agree that a binding financial agreement makes sense. You’re coming to the relationship with significant assets, and because of your age it’s unlikely you’ll be starting a family with the guy. So you should definitely protect yourself financially in the case of the relationship breaking down.

WELL DONE JACK!

JESS ASKS: At 6pm tonight my partner, Jack, is going to pay off the last of his $35,000 debt. All with the help of your fantastic book. When I met him three years ago, he was a debt-riddled 22-year-old father (of a little daughter) who could not say no to a good time. I gave him an ultimatum — get his finances up to scratch so we could start our future, or we have no future. So he consolidated his debts, paid back Telstra, paid back his parents, and paid back the three debt collectors who were chasing him.

He then changed jobs and started making the ‘big bucks’ in construction. He would come home, covered head to toe in mud, with just the whites of his eyes glowing, while I helped peel off his muddy clothes. He gave up time with his daughter to work, while I learnt how to parent a child who wasn’t mine. So, tonight he is going to pay off the last $2,500 of the loan … and we can put this chapter behind us. He is going to be out of debt for the first time in 10 years! I want to cry I am so happy, and so proud of him (and us as a couple). Thanks for your help!

BAREFOOT REPLIES: Amazing! Jack should be rightly proud of pulling himself out of the hole. Yet be honest ‒ it was a team effort, right? This is why I am so passionate about Barefoot Date Nights: they’re a once-a-month check-in, a time to refocus and track the progress you’re making towards your goals … and ultimately a celebration of the power that is you two!

You Got This!

Aussies interest rates are tipped to rise soon.

‘IF YOU’RE NOT PAYING FOR THE PRODUCT, YOU ARE THE PRODUCT’

This week Mark Zuckerberg testified before the US Congress.

It kind of looked like he’d entered an old people’s home, didn’t it? None of the old duffers seemed to have any idea how the internet worked.

Yet Zuck quickly clued them up, with his entire testimony basically amounting to, “If you’re not paying for the product, you are the product”.

Back here in Australia a similar situation was playing out, but in a different arena.

The Banking Royal Commission is in full swing, and Justice Kenneth Hayne, the head of the Commission, was trying to get to the bottom of who mortgage brokers actually work for:

“So who does a broker act for, who does the customer think the broker acts for, who does the lender think the broker acts for?” he asked.

Well, turns out that 82 per cent of customers believe their broker is acting in their best interests, according to research from the brokers’ association, the MFAA (Mortgage and Finance Association of Australia).

However, the banks, who pay brokers to feed them loans, were a little more cagey in their answers.

The NAB responded to the Commissioner like a moody teenager being questioned by her parentals:

“This is both a legal and a factual question, which — as posed at the current level of generality — is not capable of a simple answer.”

So there!

The CBA didn’t even get a chance to get its mumbo jumbo on. They got punked when the Commission found a previously secret submission from former CEO Ian Narev, who admitted that the current mortgage broker model — which generates over half of all loans in the country — is ‘conflicted’, and as a result customers are losing out.

Damn straight, secret squirrels!

So let’s detail why your mortgage broker is conflicted.

First, they get paid by the lenders, some of whom pay higher commissions than others. Does that influence who the brokers recommend? Maybe.

The Royal Commission found that the CBA’s wholly owned subsidiary Aussie Home Loans funnelled two out of every five mortgages to the bank.

Second, the more you borrow, the higher the upfront and trailing commissions paid to the broker. That’s one reason why ASIC found that customers who use mortgage brokers typically borrow more than those who apply direct, and it’s also why they found that loans arranged by brokers were 25 per cent more likely to go into arrears.

Zuckerberg, when faced with the overwhelming conflicts of his business, admitted to Congress that Facebook was considering implementing a user-pays platform that would protect users.

It’s time mortgage brokers in Australia did the same. Remember, if you’re not paying for the product, you are the product.

Tread Your Own Path!

If you have a burning money question, go to barefootinvestor.com and #askbarefoot

The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.