(03) 9020 2905Fair time to be alive, ain’t it? Australia’s in reasonable shape. Technology is making life faster, longer and more fun.
You want something, you go get it. Queen told us we can want it all and demand it now. We Generation Xers live that motto.
If we don’t have the cash, credit’s a cinch. We don’t care who. Unlike previous generations, we’re happy to have intimate financial relationships with institutions we can’t even visit. (Still doesn’t mean we have to like them.)
We can get a home loan without meeting a bank manager. We can get a credit card sent to that home’s letterbox. We can get a car loan, online, at home, while watching a car ad on the iPad. Goshdarnit. That’s kinda cool.
But we also want to retain our right to bash the banks. For being greedy. For charging too much. For lending too much to the wrong people. For destroying people’s lives with credit.
Why do banks lend so much money to some people who “clearly” can’t afford it? Why lend up to 95 per cent of the house’s value? Why then hand those people the gun (a credit card) to shoot themselves with?
Look, banks aren’t dummies. Sure, sometimes they’re annoying to deal with. Others times, they might act all stupid like.
But generally, they’re pretty switched on. Their job isn’t, actually, to save us from ourselves, from our own greed and from our unreasonable desires. Yet they do a damn fine job of that anyway.
How so? Let’s take wanting to buy a house. Wouldn’t it be swell if the day you decided, over bacon and eggs with your partner, that you want to buy a house … that you could do so that afternoon?
But we can’t. We need a deposit. And not just a little pittance. We’re talking tens of thousands of dollars.
Many lenders will lend up to 95 per cent of the value of a home. (But that means 10 per cent. There’s 5 per cent for the deposit of 5 per cent, plus another 5 per cent for stamp duty.)
If they lend that much, surely they must get a lot wrong?
No, they don’t. Because they have a very good idea of how you’re going to behave.
When it comes to mortgages borrowing limits, banks financially penetrate you, without you really knowing it, to sort out whether you’re a good risk, or bad. They know how you’ll behave come crunch-time. They can see it on the bank and credit card statements they insist on when you apply.
They price in how you’ll go if interest rates were to rise 2 or 3 percentage points.
How many do they get wrong? Currently, about 0.46 per cent of loans are “in arrears 90 days or more”. At the peak of the GFC, it didn’t reach 0.7 per cent. And being in arrears by 90 days still doesn’t mean those borrowers will default.
And what about the ugly ones, the borrowers that the “John West” Big Banks reject? The smaller lenders who play in the sub-prime space peaked at a bit over 10 per cent during the GFC and have now fallen to about 2.5 per cent.
Here’s another way of looking at it. If the big banks offer you a loan, they are reasonably certain you’ll be able to afford it.
That doesn’t mean they don’t get some wrong. And that some borrowers don’t get it wrong either. So, where do the most loans go pear-shaped?
It’s over things that are harder to predict. The Australian Bankers Association says the reasons most cited for loan defaults are job loss, getting injured, and divorce or relationship breakdown.
Up to six years ago, loans of 95 per cent were rife. The GFC killed most of them off. But the 95 per cent loan-to-valuation (LVR) is back again in a serious way.
There’s no doubt that there is a much higher correlation of “bad debts” to higher LVRs. So, one of the surest ways of making sure you don’t become a statistic, is to have a bigger deposit. About 15 per cent (including 5 per cent for stamp duty) should be your aim.
But you want that house bad, don’t you? Sure, you can have it all. And possibly now. Be aware of the risk you’re taking.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au), a licensed financial adviser and mortgage broker. bruce@debtman.com.au.