Sure, but they don’t buttress borrowers against the bursting of the Sydney and Melbourne property bubble. APRA is primarily funded by the industries it supervises. Remember the old saying – “He who pays the piper calls the tune”. That has been our experience whenever we have referred bank misconduct to APRA. This is self-regulation at its worst.
In her print version of the Sydney Morning Herald’s story on the dangers of interest-only loans, Elizabeth knight concludes with these words, “A curious footnote to APRA’s move (to tighten regulations) is that the big banks all say that interest-only loans experience lower delinquency rates than the average across their loan books.”
There is nothing curious about that. Interest-only loans experience lower delinquency rates because they do not require the borrowers to repay anything off the loan. Loan servicing is much easier when the borrowers don’t have to repay the actual loan. They just pay interest. But they have to repay the loan one day!
However, interest-only loans do go bad and then it is often fatal. That is because there are two reasons such loans go bad. The first is that the borrowers cannot even pay interest. This can suit the bank very well because it will then periodically loan the borrower more money with which to pay the interest. It is what we call a Ponzi loan and it is deadly from the start. In this way a bank traps a borrower into an unaffordable loan at low interest rates. Then when the interest cannot be paid the bank lends the extra money by way of a high interest overdraft account. It enables the bank to lend about 50% of the security value at first then ramp the debt up to about 80% before calling the loan in and selling the poor unsuspecting borrower up.
The second reason such loans go bad is that the property value falls for any one of a dozen reasons. It may be an economic recession, bursting of a housing bubble as exists in Sydney and Melbourne now or it could be that demand shifts to a different area because an industry closes down like mining did in mid-western Queensland or a power station closes like Hazlewood in Victoria. Newcastle and Wollongong have both suffered from such closures before. Banks foreclose when the debt gets too close to the security value. Then the borrower can lose that security. Banks often choose to call in the interest-only loans when property values fall and that means the borrowers could lose their own homes as well or go bankrupt.
What really irritates me about these loans is that the banks know how risky for themselves they are and how dangerous they are for borrowers. People often ask me why the banks would make such loans. The answer is simply that the banks want to maximise their profits and do not care who they hurt in the process. They rely on protection from “tame” politicians to whose political parties they have donated millions in the past, to whom they grant helpful loans and who they can convince that they are providing “jobs and growth” when almost everyone knows that they are reducing jobs and sending what remain off-shore as fast as they can. Off-shoring has two great advantages.
Firstly it is more profitable to have work done by people with equal skills and qualifications in The Philippines, or India than to give the work to Australians. Secondly off-shoring enables banks to convince the naive Australian authorities that therefore a greater proportion of profit has been made in their favourite tax haven than would be the case if the work was done in Australia.
So what can the average investor or home owner do to protect themselves against the housing bubble bursting, as almost all bubbles do eventually?
They could convert to Principal and Interest loans over a long period like 20 or 30 years if they have the income stream to make that possible.
They could save like mad to build up some cash assets with which to restructure the loan to reduce the risk when the principal becomes due.
They could sell assets to reduce the debt.
They could make very careful notes of exactly what the bank did and does from the first offer of the loan and keep that to provide to a groups like my GBAC Advisory, where I would take the matter into Federal Parliament for politicians to see what the bank has been doing. The way we do it is highly successful at putting the parliamentary spotlight on the bank. In the past this has led to a high level of political activity challenging the banks.
If people let us know as soon as the bank makes its move, we find that it is usually possible to negotiate a fair outcome for the borrower and the bank. It usually requires some concessions on all sides. Then in most cases we would help the borrower to transition to a new lender on a more suitable loan that includes Principal and interest payments.
The last big collapse was Homefund in NSW when many borrowers lost their homes. I tried to help then but people did not want help. They were confident that their local MP would solve the problem for them. I do not think that was the case in the end. Trust given to bankers or politicians can easily be misplaced. FairGO has worked for voters for 30 years and in my professional capacity as a former Chartered Accountant I have helped borrowers for even longer.
Borrowers have every right to be treated fairly. Interest-only loans are time-bombs waiting to explode because the residual debt remains high. Those who have them can always give us a call to chat about options. What I have written here is just general comment. Every borrower has a different situation to cope with. Once we know what that situation is, we can usually tailor a loan solution to match it.
APRA rules buttress Banks against bubble
Nobody should bank on APRA, ASIC or the government solving the interest-only debt problem for them because it will most likely never happen. That is not how our democracy works. However, by borrowers joining voters.network there is every chance we can make it work that way in the future.