Barefoot Investor: Make the call for financial aid before it’s too late
According to the banking regulator, one in 10 Australian mortgages are paused right now, so if you were in hot water before COVID hit, don’t just sit there bubbling away, call to speak to a financial counsellor right now, writes the Barefoot Investor.
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Get out now.” That’s the advice the CEO of NAB has given to homeowners who are struggling to make their repayments.
Yes, in his quarterly trading update last week, NAB’s new-ish chief, Ross McEwan, warned:
“There will be some circumstances where people are better off selling out early and taking some equity out of their homes, or keeping some equity, before it disappears.”
While most of the media didn’t give his words much attention, there are two good reasons that you and I should:
First, because in all the years I’ve been doing this column I’ve never heard a bank boss speak so candidly.
Bank bosses are basically politicians: they get parachuted into the top job, stay there for five years, and rocket out with $40 million. Their main job is to stick to the script: “keep lending”. (And we’ve all witnessed how bad things go when bank bosses go off script, like getting into wealth management.)
So why is NAB’s CEO sticking his neck out?
Well, that brings me to my second point: he obviously doesn’t like what he sees on the horizon.
And know this: McEwan isn’t peering into a cloudy crystal ball. Over the years NAB has invested billions into tracking its customers’ every financial move.
In fact, all the banks have incredibly detailed customer analytics that tell them what people are doing — or not doing — with their money, in real time.
Now, according to the banking regulator, APRA, roughly 1 in 10 mortgages in Australia are paused.
Which gets me thinking …
On one side, how long can the banks cop 10 per cent of their customers not paying?
On the other, when will customers who are really struggling finally bite the bullet?
It’s a grim situation.
My hunch is that the banks are betting that the overwhelming majority of their customers will get through this.
Yet they also know a small number of their customers won’t, and so they (well at least Ross McEwan) are turning up the heat on them.
My advice?
Please don’t misquote me: I am not saying you should sell your home.
What I am saying is don’t be a frog … if you were in hot water before COVID hit, don’t just sit there bubbling away.
We’re still early on in this crisis, and you have more options than you think. And if you want someone independent (and free!) to walk beside you and carefully lay out your options, call the National Debt Helpline on 1800 007 007 and speak to a financial counsellor (like me) immediately.
The last word goes to McEwan:
“We’ve seen in other crises around the world, when people try to hold on they end up walking away with nothing.”
Don’t say you haven’t been warned.
Tread Your Own Path!
READERS WRITE
JIMMY THE GOLD-DIGGER RESPONDS
JIMMY WRITES: Having my gold question answered by you just knocked me off my old sneakers, and I was not offended whatsoever!
On the contrary, I was overjoyed and showed your reply to my wife.
She was overjoyed that you agreed with her about owning shares instead of gold.
As a reward for my honesty, she wants to buy me a bar of gold bullion. I will be stroking gold soon and might even take it to bed. Maybe it will help me sleep better than a weighted blanket.
Now all are happy, maybe even Karen who criticised you so intensely. Thanks a lot, mate.
BAREFOOT REPLIES: I’m glad to be of service.
And given that I’ve been labelled a misandrist (‘man hater’), and been threatened with the Racial Discrimination Act, I will certainly not even comment about how happy I am that a 71-year-old bloke can go to bed ‘stroking’ a gold bar.
You got this!
DODGY BANKS, DODGY ACCOUNTING
STEVE WRITES: Hi Scott (you dirty misandrist haha!),
I am hoping to get your thoughts and advice on these dodgy banks.
Years ago, I bought a home for $535,000, with a 5 per cent deposit, initially paying ‘interest only’ on my home loan. (So a ‘loan to value ratio’, or LVR, of 95 per cent.)
Cut to today and I have brought the loan amount down to $460,000. So I thought I’d do the Barefoot thing and ask my bank for a better rate than the 3.97 per cent I am currently being slugged with.
Yet when I called them to review my loan, they said that because my house price has fallen (I live in Perth) they now consider my LVR to be 120 per cent! I expected them to reduce my rate once my LVR was sub-80 per cent of the original loan and house valuation.
My question is: can they move the goalposts like this? It is absolutely shattering!
BAREFOOT REPLIES: Better grab two Panadol and a Berocca, Steve. This one’s going to be rough.
Here’s the deal: you bought your joint when the property party was in full swing.
Your bank was feeling liquid and loose! How else can you explain that they let you buy into a new suburb with just a 5 per cent deposit and an interest-only loan?
Now it’s the morning after, and the hangover has set in.
In your case the bank has revalued your property down from your original purchase price, $535,000, to around $380,000. And that’s how you get the 120 per cent loan to value ratio — you’re only looking at the ‘loan’ part of the ratio while the bank is looking at the ‘value’ part.
Bottom line?
You’re upside down.
If you had to sell in a pinch, you’d be out of pocket. As would the bank (and banks hate losing money).
The situation you find yourself in is why I steadfastly recommend people save up a 20 per cent deposit.
You’re in no position to negotiate a better rate, so there’s no hair of the dog for you, my friend.
It’s tough, but you need to ride the porcelain bus, then get cracking on paying down that loan.
GRANNY’S MESSAGE IN A BOTTLE
MARY WRITES: I have $10,000 in a bottle buried for my only granddaughter, who is two. I want to buy her a car when she turns 18, but I may not be here by then as I am nearly 68, and I also realise it will not be worth much by then.
I would like to know how I could grow it better.
BAREFOOT REPLIES: Money in a bottle?
That reminds me of a guy I know who does a lot of cash jobs. Over the years, he has buried some of this cash in his large yard. Yet one day he went to dig it up and, lo and behold, he’d forgotten where he’d buried it.
So he got what he uncharitably called a “yokel” (local) to find it for him, being careful to describe it as “just an old box of papers”. “I’ll pay you ten bucks an hour … but no bloody lunch breaks!” he snarled, as he left in the morning in his Merc.
That evening when he returned home, he couldn’t believe his eyes: the yokel had dug up every inch of his expensively landscaped yard. Seriously, there were more craters in it than the moon. And yet, despite his hard work, the poor yokel never did find the box. (Or so he said.) True story!
And the moral of the story is that keeping your money in a bottle is not a good idea. You have 16 years to grow it:
I’d suggest thinking about investing it in the share market via a low-cost fund. You may also want to investigate a share investment bond, which allows you to nominate what age your granddaughter can receive the money, and for what purpose.
Do that and the only bottle you’ll have to focus on is champagne at your granddaughter’s 18th.
Got a money question? barefootinvestor.com #askbarefoot
Scott Pape is an independent, community-based financial counsellor. Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions.
The Barefoot Investor for Families: The Only Kids’ Money Guide You’ll Ever Need (HarperCollins)RRP $29.99