How To Beat Your Bank

This week I gave my first radio interview live from a dance floor in the birdcage at the Melbourne Cup. As interest rates rose, I was downing champagne.

I wasn’t that shocked – like I was when ‘So you think’ didn’t win The Cup.

The Reserve Bank has long worried that the resource boom is flooding our economy with cash and potentially pushing up prices, so they simply tapped the economic brakes by putting up rates.

And the banks have all been loosening us up for months in the media about having to raise their rates – and the CBA was the first horse out of the gate. The only interesting thing now is how long it will take the other three to catch up.

But the inevitable chorus of bank-bashers that hit the media the next day – all spruiking ways to get back at the banks – left me with a bigger headache than I’d inherited from the champers.

Yet most of their suggestions were about as useful as the biros that bank managers keep chained up in their branches.

Let’s take a look at a couple of the so-called solutions, and then I’ll show you what I do to ensure that I don’t tip in more than my fair share of the bankers’ multi-billion dollar bounty.

‘Ban bank exit fees!’ say the pollies

Both sides of politics are zeroing in on exit fees, which stop consumers from switching lenders to get a better deal.

While it sounds good as a grab on the nightly news, in the current environment it’s just not a sustainable solution. Here’s why:

Whether we like it or not there is a cost to setting up a mortgage. You can pay that cost at the start, or you can spread it over the first few years of your loan – which is how the banks hide the cost. But if you decide to leave their party early they’ll slug you with some sort of exit fee to recoup their costs. Why? Because they can.

Barefoot warning: Unless new competition emerges (and it’s unlikely in the current climate), whatever the politicians propose in regards to exit fees, the banks will get around and hit us with these costs somewhere else.

‘Leave the banks’ say the consumer watchdogs.

It makes sense that if the banks are in the firing line and they’re all treating us so badly, that it may be worthwhile looking at community based credit unions, where profits go back to members and often result in lower costs.

When I last refinanced, I tarted myself around to practically every lender I could, including banks, credit unions, building societies and other non-bank lenders. And the sharpest deal I could get at the time was actually with one of the big four.

While it was reported that thirty-seven credit unions and eight building societies have home loans that are cheaper than the cheapest major bank home loan – that doesn’t necessarily mean that you’re going to snag that rate.

The price you pay for your loan is determined by a range of factors: your income, the type of property you buy and it’s location, and the equity you have.

Barefoot warning: Some of the reports this week were little more than press releases from credit unions riding the anti-bank wave. Don’t discriminate against any lender – focus on getting the best deal you can negotiate.

How to really beat the bank

The higher funding costs that the banks are incurring from overseas lenders isn’t going away any time soon. That means you could be in the situation where your lender yanks up rates higher than the RBA.

You need to cover yourself as much as you can. Here’s how you do it:

1. Make sure you understand any potential exit fees that you may be charged if you choose to switch, and use this as a basis to compare any new loan.

2. If you’ve bought a home in the last three years, check to see that you’re not going to be recharged Lenders Mortgage Insurance (LMI). One of the dirty tricks of the industry is that if you switch banks, the new lender will hit you with LMI again – even if your bank uses the same insurer.

It’s like paying car insurance twice. And it can cost you thousands more than any exit penalty (are you listening Mister Swan?).

3. Make sure you go to a mortgage broker that rebates to you the dirty little kickbacks that the banks pay to grease the palms of the people who flog its products.

Ensure their policy is to rebate the entire trailing commission and that they apply it to your principle. Over the life of your loan, this can slash tens of thousands of dollars in interest and years off your mortgage.

4. A while back I had the opportunity to chat to Ken Fisher, a self-made billionaire, and one of the most influential money managers on the planet – here’s the gist of what was said.

Barefoot: “If you could only invest in one Australian company – what would it be?”

Fisher: “A bank. Buy any of them. Buy all of them – they’ve basically got a license to print money. There’s not much competition, they’re paying great returns to shareholders, and your nation’s prosperity is all but underwritten by China”.

He’s got a point. My mortgage went up this week, but hopefully so did the dividends on my bank shares. If you can’t beat them, join them!

Get the bankers off your back for good, and pay down your mortgage faster.

Tread Your Own Path!