The notice on the board is clear – wages stagnating – jobs reducing – the economy stalling – efforts to restart it failing. All is not well in the Kingdom of OZ, or many other countries either
There are those with large debts but even larger profits and assets. For them, if borrowing is profitable, then extending it is probably a good move. First they need to very carefully check their net profit stream to see how it might be affected by an economic set-back. At the same time they need to check out any likely reduction in the value of their assets. Provided that they do their financial analysis correctly and are fleet-footed enough to move ahead of any trend, they may be able to make good use of the crumbling interest rates.
The situation is different for those with falling turnover and profits, needing to borrow more long-term to keep the show afloat. They may be looking to expansion of their income base or new technology to cut costs based on new loans. If I were them I would be negotiating very hard with a number of banks for the best deal possible and the best terms to take account of any slump in the economy. Banks are charging less because borrowers will not borrow at higher rates, so borrowers are in the box seat.
Watch out for nasty little covenants in the loan contract that give the bank the right to sell assets up at the drop of a hat. For these borrowers good regular financial analysis is vital. Monthly financial statements including balance sheets should show comparisons with last year and budget. Negative variations need to be looked at closely and rectified unless they are producing greater revenue than what it costs. Profit is the only factor of interest because that is what the borrowings are for and that is the greatest protection against unfavourable bank action. Figures without balance sheets are not worth looking at because of their potential for error.
For those with modest incomes and modest assets, this may not be the time to acquire additional assets on borrowed money. A careful risk analysis needs to be undertaken to test the various scenarios to see what evasive action could be taken if a crash eventuates. There needs to be a good escape route. That usually means assets that can be quickly turned into cash or alternative sources of funding should the debt be called in. The risk of asset prices falling is considerable and the risk of business going flat might also be considerable.
External advice sometimes helps because the business owner tends to justify what they want to do. An external adviser who is not afraid to offend will tell it like it is.
For those already in trouble with the bank and whose business profits are holding up well, they would in my view be well advised to clear debt fast while interest rates are low. Reducing debt is the best risk management strategy that I know of for those already dealing with unaffordable debt.
However, before they do that, if they feel that they have been in some way cheated or misled by the banker, they should seriously consider a challenge to the debt level. By that I mean they should consider whether to atone for past behaviour the bankers would be “willing” to write off a significant portion of the debt. There are many ways of encouraging that.
I could be mistaken but I would not be going down the “free” pathway of the Financial Complaints Authority. It is really just a re-make of the old Financial Services Ombudsman which in my opinion was completely biased towards the banks. No surprise there. Like FOS, the Financial Complaints Authority is not the government body you might suppose from the word “Authority” but is in fact owned by the banks themselves and their fellow or subsidiary financial services providers. Others may disagree but I would be staggered if the Complaints Authority would assist borrowers in any significant way when dealing with rogue bankers.
Banks are under pressure with a crumbling economy and the Royal Commission aftermath. That would seem to me to put them in a most vulnerable position. Since many of them having been screwing their customers for years, this may be the right time for indebted customers to do a bit of screwing themselves.
For home buyers this is probably a time for quietly hunting around looking at various locations to see what can be bought for a lot less than it could have been a year or two ago. Those with sense of adventure could check out some of the inland cities where prices are unbelievably low.
Last week I looked at a new subdivision on a hill on the edge of Braidwood with breath-taking views. The blocks were selling at around $200,000 and a new home and land was available for $560,000. The trip to Batemans Bay on the coast is about an hour or so and to Canberra in the opposite direction about the same. An hour to Goulburn and a couple of hours to the snowfields. There is a lot going for that proposition. With NBN it is possible to do business with the world. Australia is easy. I have dealt with borrowers from loan applications through profitability to debt mediations in every state and territory of Australia, from further out than that, for decades.
But even in the expensive big cities there are always bargains to be had for those prepared to wait. The benefits in lower repayments and capital gains are enticing. It is a case of rarely paying the asking price and making sure that that is well below the expectations of other sellers.
For young people seeking their first homes, the market is much better now and may get even better in future. If you can negotiate a good price for your house and borrow at the current very low interest rates you have a great asset for the future. My advice would be to buy a nice basic house, not too fancy, in a nice street, in a nice area, for not too much money. Then you can pay it off reasonably quickly with some social sacrifices and look to building some wealth for mid life. Your house just has to suit you and any family. It does not have to impress others or make the lenders rich.