Dodgy Banks, Dodgy Accounting

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% deposit, initially paying ‘interest only’ on my home loan. (So a ‘loan to value ratio’, or LVR, of 95%.) 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% 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%! I expected them to reduce my rate once my LVR was sub-80% of the original loan and house valuation. My question is: can they move the goalposts like this? It is absolutely shattering!

Steve

Hi Steve,

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% 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% 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% 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.

Scott