Banks have, over the years, copped a fair amount of criticism both from the public and from regulators. Some of it is deserved and some of it is the result of misunderstandings or skewed stories. Nowadays the banks are under heavy regulation and their world is incredibly different to the pre-GFC years. Here are some myths about bank mortgages that simply aren’t true anymore.
1. The banks don’t want you to pay your mortgage
The banks make money on the interest paid on a mortgage. It makes sense therefore that a profit-maximising business would want to keep you in debt as long as possible. But actually a bank would much prefer you pay down your mortgage.
As you make repayments, the bank can lend that money out to another customer and have a diversified list of securities. For example, a bank would much rather have two customers owing 45 percent of the value of their home than one customer owing 90 percent of their home. It is almost the same profit but the odds of the bank getting all their money back if something goes wrong - such as a global pandemic - is much higher with two clients.
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These days banks only allow interest-only for a maximum of two years on a personal property and five years on investment property.
2. The bank will be more lenient because you’ve always banked with them
Some applicants still believe that a bank will push a few boundaries for long-term customers. They see mortgage-lending as akin to lending money to a close friend who’s good for it.
In 2015, the Responsible Lending Code took away a lot of the bank’s abilities to make gut decisions on lending. A lender must be confident that the client can afford to borrow the money and there are serious repercussions for breaching this code.
The Responsible Lending Code is a good thing. It aims to protect people from predatory lending like the 8 percent per week loans that we’re popping up. And for banks, it’s a good benchmark to lend on so we never get back to the reckless lending typical around 2005-2008.
3. If you get multiple approvals, you can play the banks off each other
The banks need customers but it’s important to understand how many customers they have at any one time. Every day, just one of the big banks could easily assess over 500 applications across their branches and mortgage adviser networks. The act of applying at multiple banks for pre-approval (in order to seek a slightly better rate) more often annoys the bank than bends them to your will.
Imagine asking a dairy owner for a discount on a Moro bar or you’ll take your business elsewhere. The owner doesn’t want to lose a customer but the overall damage to their income is fairly minor. The secret to getting amazing rates at a bank is to be a low risk. A good deposit and/or proving good stable income, purchasing a high quality house and being good with your spending all tend to get you the best rates in return for being a low risk client.
