Bankers in particular knew that ultra-low interest rates were unlikely to last for long without a recession or depression, as did most accountants and economists. The rates would probably rise instead. This would apply equally to a home loan, farm loan and business loan.
Most business loans and farm loans are for between 15 and 30 years. Most home loans are for 30 years. So borrowers are in there for the long haul and a lot can happen to interest rates in a year.
If in 2023 Australia goes into recession or depression, the properties providing mortgage security for loans would probably collapse and many borrowers would not have the assets to make up the required security. The other impact of a recession is worse, loss of jobs and income. The bank might try to foreclose and sell the property up. Those borrowers could lose all their hard earned equity in their home, business or farm.
If on the other hand interest rates continue to rise, the borrowers may find that they cannot afford the increased repayments. There are plenty of million- dollar loans out there throughout Australia. Each 1% increase in the interest rate on each $1m of a loan costs the borrower $10,000 a year.
To survive, the borrowers would have to earn an extra $10,000 in net disposable income. That is an extra $10,000 in pay-packet or an extra $10,000 Net Profit, per million dollars of the loan or a similar reduction in spending. But rising interest rates can be synonymous with inflationary increases in prices, so to earn extra net disposable income could be a serious challenge. If that happened, many borrowers would again be unable to meet the loan repayments.
Because the banks had already been clever enough to issue a variety of loans that were always unaffordable from the start, there is potential for a mass of debt defaults in 2023-2025. In these cases the banks could foreclose and overall mostly recover close to the amount they had loaned out, maybe even more because accumulated unpaid interest can take a debt way beyond what it started out as.
Profit before principles – always
The big four banks, having earned $2.8 billion dollars profit last year between them, could afford to lose a bit here or there. The borrowers given potentially unaffordable loans would not be so lucky.
Of course, there are some excellent smaller banks and bank staff at non-executive level are mostly very helpful and honest people.
Just to ensure that they were in control, the bankers had legislation passed by the last Federal Government to prevent many consultants from helping borrowers, particularly home buyers and other consumers. These borrowers are restricted by law from getting help from almost anyone not in the pay of the banking and financial services industry. Lawyers are an expensive exception. The aim of the banks is to send people to financial counsellors who receive bank funding and are not known for getting dishonest banks to write off debt that has been fraudulently created. The alternative is to receive assistance from the moneylenders’ very own industry body called AFCA which is so blatantly working for the banks that until recently the most compensation they would award was a maximum of $5,000. Recognising their own dishonesty AFCA, as the result of a critical review of its operations following the Banking Royal Commission, has increased that to $2 million. But it has not gone back over past cases to re-assess compensation and increase amounts from $1500 to $15,000 or even $150,000 when that was the damage done by the bank to the borrower.
Even restricted free speech
The bankers have even successfully banned free speech in Australia with the Credit act preventing any paid consultant outside of the ruthless, bullying bank-controlled circle of “dispute resolvers” from even speaking to a borrower about dishonest bank action or speaking to the bank about it on behalf of the borrower. “We have ways of resolving your dispute”. Indeed the bankers do!
The banking industry has stitched up control so that it can continue to rob, defraud and deprive borrowers just as it did before the Hayne Royal Commission exposed its dishonest practices and issued multi-million dollar fines. I don’t think it sent one bank director or CEO to gaol. Yet a woman who stole $2m from nab was quickly sentenced to imprisonment. Crooked bankers are well protected from gaol no matter how much they steal from or defraud Australians.
Batting for the borrowers
For the past 35 years since de-regulation, GBAC has worked steadfastly with business and farm borrowers, to have their banks write off unreasonable amounts of debt that were created by the bank’s improper lending practices, lies, deceit or totally inappropriate loan management. We have done that by working with those banks to carefully explain to them what they had done wrong and the impact it that had on their particular customers. The banks, some very willingly, and some very grudgingly, have paid up to compensate their customers for the damage caused to them by the bank’s action. We have had 100% of two debts written off and $5 million written off another. At least one bank CEO has been most helpful and really does care about his customers.
However, profit is key to bankers and that comes largely from charging customers more for the services, than it costs to provide them. People in Rural and Regional Australia and in the suburbs know about that. After the Royal Commission some of the banks had to come up with a clever way to continue to rip off their customers and they have found, in the Credit Act and AFCA, a way to do it.
However, we have very good parliaments in Australia, despite the impression often given in the media. The parliaments are our source of fairness and justice. Borrowers worried about how they will manage their loans throughout the years ahead will be able to easily take their cases to ALL parliamentarians by sending Votergrams to MPs.
Meanwhile all borrowers might look closely at how to minimise risk by increasing their loan terms by some years to reduce the principal amount that is included in each repayment. They could also look around to see what cheaper loans might be available if they needed to refinance in the face of a bank demand for full repayment of the loan. LoanApps can help with that. It may, if possible, also be wise to cut expenses and do everything possible to increase income.
None of us knows what the future holds, but the Girl Guides and Boy Scouts have a great motto that could be followed to advantage by borrowers. It is “BE PREPARED”. I have found it invaluable in the farms and businesses I have run, as well as for helping those we consult.