THE MAJOR Australian banks’ financial advisers are copping it, as we continue to hear their customers’ interests have not always underpinned their recommendations in a Banking Royal Commission that has so far exposed shocking conduct.
It’s disgusting and it’s now obvious that this inquiry was needed to clear the air.
People are now understanding that banks are loyal to their shareholders and not their customers – confusing, as we assume banks have a moral obligation to look after us.
After a career working in four banks, I see things from a different perspective.
Mortgage brokers seem to be coming out of the hearings OK, although there was some concern over credit advisers recommending that people borrow more than they need.
For example, if a couple was looking to refinance their $500K mortgage – secured by a $1.5M home – a mortgage broker might suggest borrowing an extra $700K, if the bank’s servicing calculator permitted.
This could be set up as a line of credit, or as ‘Loan B’, with its very own offset account.
For clarity, either way, it would mean that there would be no interest paid on this ‘cash out’ unless it was actually used.
Let’s first look at the potential negative outcomes.
I refer to a question we at iChoice always ask in our 34-bullet-point questionnaire, in which respondents rate each item with a “1”, “2”, “3”, “4” or “5”.
The question is: “How do you rate your financial responsibility; that is, your ability to not spend money just because it is available to you via redraw of offset?”
If they tick 1, 2 or 3, it may be the signs of a ‘spendaholic’, or an indication of some other dependency, like enjoying a punt. In this case, a mortgage broker must respect that the client probably doesn’t need to see $700K available to them every time they go to an ATM.
If it’s all in an offset account, the balance will show on the screen as “$700,000 CR”. This can be misleading. It’s not theirs to spend willy-nilly: it’s their equity in their home and if they spend it, they’re increasing their effective debt.
Now let’s look at the benefits of ‘equity unlocking’. In the example above, this couple now has $700K they can spend at any time in the future, just by cutting a cheque.
If they wanted to renovate their home, buy a car, build a pool, help the kids or go on a holiday, and need some cash to do so, they don’t need to go through the hassle of another loan application to get extra cash – it’s all sitting there.
Imagine if, in a couple of years, their circumstances change – they may not be able to use their equity and won’t get the $700K approved!
There’s an even bigger benefit. Let’s say they wanted to buy an investment property.
Firstly, they can cut a 10% cheque at auction, without the need for an expensive ‘Deposit Bond’.
But if the property is being sold for $600K, they can offer great terms to the vendor. For example, they could offering only $550K, because they can grab their money from their offset account and buy the property and it can settle in a matter of days.
They can do this by using ‘Loan B’ to fund it all, without charging the new property to the bank. So, it’s great to have an investment that is unencumbered.
This is so powerful because the settlement term – normally 6 weeks – is a negotiating point just like the selling price.
Having all the funds available works wonders for deceased estates and divorce sales, where vendors just want to get their hands on their money and move on.
Combine this with a December sale and it’s even more powerful. Vendors love the idea of being able to settle before the holidays. Christmas does funny things to people.
Most banks won’t allow you to ‘unlock’ $700K without an immediate purchase on the cards, and even if they do, they’ll charge the ‘investment rate’ on that portion (Loan B).
Luckily, there are a couple of banks that will do both ‘Loan A’ and ‘Loan B’ at the owner-occupied rate of 3.70%. A no-brainer if you consider yourself financially responsible and want the maximum flexibility to get ahead.
At iChoice, if you tick 1, 2 or 3 for the question above, we won’t even speak to you about the benefits of unlocking equity, respecting that it might not be right for you.
What a shame the banks aren’t as responsible as we are. I guess that’s why there’s a Royal Commission. So for advice that’s right for you, rather than the banks, speak to us.
The Barefoot Broker, Jason Khoury, is the Managing Partner of the award-winning Concord West-based iChoice and can be contacted on 9743 0000.