My working life has been spent in the finance industry. Over the past 32 years I’ve worked in a broad variety of roles, and seen significant change in the way financial products and services are marketed and delivered. I’ve been employed in management roles with a range of banks, and I’ve also worked as a self-employed mortgage broker.

Primarily through advancements in the use of technology, the delivery of financial products and services has changed significantly during this time – However the one constant with the delivery of financial products and services has been, and will always be that they are delivered with a view to maximising the profit for the provider of the product or service.

To illustrate my point I will use obtaining a home loan as an example. Whether you deal directly with your lender or you choose to use the services of a broker, the product being provided to you will generate a profit margin for the lender. Furthermore, the remuneration of the person providing your advice is often tied directly to the sale of the product being provided to you. Most bankers now days will be set with sales targets they must achieve, and brokers are only paid based on what business they introduce to lenders.

As the consumer you are not necessarily getting a bad deal – but are you getting the deal that is best for you? Do you even know how to recognise what will suit you best, and if so how to ask?

Let me be very clear here – I’m not suggesting that bankers and/or brokers are ripping borrowers off. I’ve sat in the banker and broker chair for many years myself. I’m simply pointing out that I think things can be done better from a transparency point of view.

One of my primary motivations for starting Empower Money Management was that I thought that consumers could benefit from the provision of better education with regard to managing their own money, and making best use of their own banking facilities and arrangements.

The commercial reality of the provision of banking products and services is that the provider is making money out of the product/service being provided to you. Philosophically I have absolutely no problem with that; that is the nature of the capitalist system that we live in.

 What I think can change significantly for the better is the understanding that people have of the financial products and services they use.

How can you be sure that you are getting the deal that suits you best if the primary motivation of the provider is what profit margin they generate from the transaction, and how many additional products and services they can sell to you?

At Empower Money Management I DO NOT SELL products and services. I am not remunerated by selling an additional financial product or service you didn’t ask for, don’t need or don’t understand.

As a consequence of NOT being remunerated based on the sale of a product or service I can provide a genuinely unbiased comparison service for my clients, where I can help you to understand the range of benefits a product or service may offer. Through education and understanding you are then in a much better position to be able to make informed choices with regard to the purchase of a financial product or service.

I provide fee-for-service coaching and education on the better use and understanding of your own money, including coaching that covers how to ask your banker or broker for a better deal on your existing or proposed facilities.

I am happy to sit down with my clients and help you to analyse where you can make savings on your existing arrangements, and empower you with the skills to make positive money management decisions a part of your day to day life.   
 
To make a positive difference for yourself make an appointment with Leigh at Empower Money Management.
 
M:           0407 439 827
leigh@empowermm.com.au             www.empowermm.com.au
 
 

Recent statistics show that rates of household debt are at all-time highs in Australia. Given that mortgage interest rates sit at all-time lows it is critically important that all mortgage borrowers understand the fundamental difference between what your lender will allow you to borrow, as compared to what you can comfortably afford to borrow.

To illustrate my point, as a general rule of thumb your lender will consider the following points (not an exhaustive list) when assessing your loan application;

• Your and/or your partner’s current income levels
• Your and/or your partner’s current debt levels
• Your deposit and/or equity contribution
• Current other fixed commitments (e.g. School fees, maintenance payments)
• The proposed loan term (usually 30 years)

 
The critical learning here is that your lender is obligated to make their assessment of your borrowing capacity based on your current financial circumstances, and current market interest rates.

From your lender’s perspective, your maximum borrowing capacity is therefore based on your current financial circumstances, plus a margin (the calculation will vary from lender to lender) that theoretically allows for future interest rate rises. 

The lender’s initial affordability calculation doesn’t consider the following – How many times during 30 years might your financial circumstances change?

Mortgage stress will generally occur as a result of a change in a borrower’s income circumstances and/or as a result of increases in the interest rate on your loan.
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Some of the common examples of a change in household income and/or expense levels include;

• Job loss/change
• Birth of a child
• Change of relationship status
• Education expenses
• Committing to further debt obligations (e.g. car loan)

Borrowers need to understand that not only do you have to be able to comfortably afford your loan repayment at the commencement of the loan; it can potentially take 30 years to repay your home loan.

In my opinion it is very important when committing to a home loan to recognise that home loan interest rates currently sit at all-time lows, with current owner occupied variable rates sitting somewhere around the 4.00% to 4.50% range.

To clarify my point, please refer to the following table;

• A variable rate loan of $250,000 over 30 years with an interest rate of 4.50% - minimum monthly payment required is $1267
• A variable rate loan of $250,000 over 30 years with an interest rate of 7.00% - minimum monthly payment required is $1664

As can be seen from the example above, if over time there was a 2.50% increase in the variable rate it would lead to an increase in minimum monthly repayment of $397.

A potential adverse change in a borrower’s income circumstances, along with a potential upward change in loan interest rate will often lead to a case of mortgage stress.

Obviously no-one has the ability to be absolutely certain of their future circumstances, however in my opinion the critical question around housing affordability becomes – Can I afford my home loan both now and into the future, whilst maintaining the lifestyle I wish to lead?

A wise home loan borrower will generally consider both their existing financial position, and their likely future capacity to remain financially comfortable when entering into such a large and important financial commitment as a home loan.

To learn more about the effects of interest rate changes on your borrowing capacity, and also to get help to build a sustainable budget that can withstand other potential negative influences on your financial wellbeing contact Leigh at Empower Money Management today.
 
M.        0407 439 827
leigh@empowermm.com.au
www.empowermm.com.au