Today’s media is full of comment about the possibility of bank lending coming to a grinding halt as the combination of the Royal commission, falling house prices, drought, floods and fires rocks the finance industry.
Borrowers wonder whether they will be able to obtain the finance they need for their businesses, farms or homes. The Treasury wonders whether the stability of our major banks will be threatened by the risky loans they have issued in the last decade or two.
Politicians promise counsellors to help borrowers sort out excessive loan problems.
Banks of course will not stop lending because that’s how they make their profits. Therefore borrowers need to fit within the bank parameters with good loan applications instead of engaging brokers to do the job for them. The commission reported on extensive problems with mortgage brokers.
What GBAC has been doing for decades is conferring with borrowers and working out how to help them borrow on the best possible basis. It must be obvious that if banks are paying mortgage brokers a commission for obtaining loan business, the mortgage brokers receiving the commission will be working for the bank rather than the borrower. The process seemed appealing to borrowers because they did not have to pay for it. The broker appeared to be looking after the borrower for free. However one normally gets what one pays for and that is particularly so when dealing with moneylenders, governments and businesses. It would be sheer fantasy to believe that the borrower was not paying for the broker’s commission within their loan repayments.
When the bank and its broker does all the work for a mortgage it is reasonable to expect that the loan will be heavily slanted towards the bank’s benefit. When the borrower employs a banking expert to help them obtain the right sort of loan with the best interest rates and charges and loan terms that are appropriate to the borrower it is reasonable to expect that the loan will suit both the borrower and the bank.
It is at this point that it pays for all of those on the borrower’s side of the table to do some careful homework and find out what risks exist for the borrower and how any unexpected surprises would be handled. This information should then be converted to a brief risk management schedule filed with the loan documents for easy access when problems arise. It is very rare for a loan to run its course without some problems arising so it pays to be well-prepared and deal with those problems as they arise. The very best policy that we have found over the years is for the borrower to contact their loan consultant and have the consultant contact the bank with solutions that will be acceptable to the bank. The biggest debt problems arise when borrowers failed to quickly remedy loan defaults by satisfactory discussions with the lender.
Then the question arises as to whether the borrower will be able to service the loan with interest and charges as required and repay the debt exactly as specified in the loan agreement. This requires detailed study of the loan agreement by the banking consultant and expert legal advice which is best provided to both the borrower and the banking consultant so one involved is working in the same direction. This is the point in borrowing that most problems arise though they may not manifest themselves until many years later. There will almost always be doubts in the mind of a borrower, banking consultant and lawyer as to how the loan is likely to play out for the borrower in the future when nobody knows what the future holds.
For the borrower that is in doubt about what to do, the best advice is to find out and that means discussing the problem with their loan consultant. The cost of that will be minuscule compared to the costs of a major rescue if penalty interest rates are applied, foreclosure is threatened or receivers and managers appointed.
I am always happy to have a free no-obligation chat with someone wondering whether we can help them or not.
greg@gbac.com.au or 0428 417 496.