Mistakes Borrowers Make

With finance the flavour of this month’s newsletter I thought I’d pen a list of borrower’s mistakes. This list is not specific to investors or owner occupiers; they are basic mistakes or assumptions that lead to mistakes that all borrowers can make…..

So let’s take a look at them (in no particular order):

1) Going straight to their current bank, credit union or building society

Given the choice of loan products in the market, why would you not shop around your business?  If you are time poor get a broker to do it for you.  There are plenty of lending options out there with great features and benefits from both a financial and useability standpoint.  Restricting yourself to one lender and their couple of options is showing your short-sightedness and potentially your lack of ability to get the best result financially for yourself.

Those of you thinking ‘Well, my bank is safer than some lenders out there’ remember this – you owe them money, therefore your loan is a income producing asset for that lender.  So even if by chance a lender does go broke (unlikely in the current market with APRA regulations) you have protection in the knowledge your loan will ultimately be bought by another bank/lender, so it’s business as usual for you as a mortgager.

2) Having a relationship with bank staff

I wish I had a dollar for everyone who tells me they had a good contact or relationship with someone at the bank, only to have that person ‘move on’.  This will continue to always be the case because of how banks treat talented and customer focused staff.  They promote them into roles that manage staff, rather than managing customers, or they give them too many customers to manage and they burn-out or leave.  Lenders have too many customers to deliver personalised service, so loyalty is only going to cause future frustration for you down the line. 

My advice to you is to become ‘open minded’ and flexible with your banking mindset when it comes to securing the best deal.  

Sure, refinancing every 3 to 5 years might be a little bit of an inconvenience, but it’s worth it if you get what you want at that point in time.

(Our Mortgage Broking division benefits greatly from new clients moving to us to manage their finance affairs, because our talented staff’s sole purpose is to manage our customers needs and wants – all day, every day)

3) Inadequate loan selection and structuring

Undoing one lender’s ‘stuff ups’ can be costly to newly introduced clients to Empower Wealth. Often lenders’ staff are too busy in their overall roles within the bank, therefore they lack adequate time to provide a full view of the lending landscape or sometimes they simply don’t have a true idea of the overall lending landscape, because their product offerings are not available across all the market segments.  With only limited knowledge to make a decision on a lender or loan product, it’s a logical outcome that borrowers are going to make mistakes and sometime very costly ones too!

4) Getting ‘sold’ a loan

Unsuspecting borrowers should realise that banks and lenders ‘sell’ loans – that’s what they profit from, lending their money at higher costs than they source this money for.  It’s their business model.

Lenders’ staff whose role it is to sell home loans must justify their employment by selling home loans.  If they don’t sell, they don’t have a job with that bank.  Hence, they are well versed in typical lending lines such as:

• “Our loans are superior to other lenders because….”
• “We have won awards” – Show me a lender that hasn’t won some type of award for their product or doesn’t have a loan rated as either 4 or 5 star with a lender rating agency.
• “Our interest rates are the cheapest” – You might have the cheapest introduction rate, but after one or two years your rates go through the roof and the break costs to get out will result in you paying more than what you saved on the cheapest interest rates.
• “Don’t use a broker, they charge fees” or “Don’t use a broker, we can do a better interest rate than a broker can” – Professional MFAA brokers do not charge a fee for sourcing a loan for a client and brokers are actually a cheaper form of distribution than their direct lending channels, as they have huge costs in leasing premises, staffing branches, holiday and sick pay, branding and marketing costs of promoting ‘friendly and state of the art’ branches. Put simply – from a broker’s point of view, if a lender doesn’t have the most competitive and flexible product to offer our client, then it won’t be recommended, period. Our clients will always be offered a choice of lenders with exceptionally competitive offerings.

5) Bought the loan because of the cheapest interest rate

Any lender promoting their loan as having the cheapest interest rate as their only selling benefit should ring alarm bells.

Upon inspection of these lenders’ mortgage documents it will clearly state the lender, in their sole right and without the borrower’s consent can increase the interest rate at their discretion. Now just for the record, almost every lender in the market has a similar clause to this, but once you are signed up, you’re stuck.

Examples of the lenders whose rates may have been competitive at the point of sale, but later increase rates above the RBA cash rate include: CBA, NAB, Westpac, ANZ, ING, St George, RAMS, Wizard, Suncorp. Basically every lender in the market has been guilty at one time for increasing their interest rates above the ‘norm’, so choosing a lender based on interest rate alone is putting all your ‘eggs in the one basket’. Let’s just hope the lender doesn’t drop your basket.

6) Not factoring in future planning

If a future unforeseen event is to occur with your property or finances, it is important to select the right loan which factors in such events, otherwise there could be financial losses or penalties involved.  If you select a loan product that limits the amount of money you can pay back into the loan, such as most fixed loans, yet you might have a sizeable windfall coming your way in a year’s time, you may not be able to put this money to its best or most effective use, because of the conditions of the loan contract.

Furthermore, there might be a plan to acquire another property or two down the line, yet the loan product is inflexible and costly to replicate further lending, costing you significant further lending costs.

Unfortunately, I could go on and on with mistakes borrowers make and the tidy up work we have to take care of.

Bottom line is this, no one deliberately goes out to make a mistake when borrowing money that is costly and time consuming to rectify.

For the record you all know I’m completely biased towards using a broker, because I am a qualified professional broker and it’s a service we offer within our business, but let me pose a simple question to anyone – if a broker has a suite of lenders and hundreds of loan products and works exclusively for the client and the lender is simply a means of supply to loan and banking services, why wouldn’t you use a broker to avoid making naive and inexperienced mistakes, especially when their services are free to you?

If you’d like to learn more on this topic, check out our podcast, The Property Couch. We’ve got 500+ weekly episodes on property, finance and money. And while you’re there, check out the Summer Series. It’s when we interviewed other investors on their wins, mistakes and heaps more. You’ll get to learn from other investors and more!

Remember…knowledge is empowering, but only if you act on it!

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