Check your loan is not a life sentence

Flexibility: Make sure the terms of your loan are flexible for when your circumstances change.
Flexibility: Make sure the terms of your loan are flexible for when your circumstances change.

The email header was irresistible: Bank madness! And "madness" was the perfect term for it. The writer - I'll call him Barry - has spent much of his life working in the banking industry, and is well aware of how the system works. He lives in a Queensland coastal town, and in 2016, due to a change of jobs that required relocation, rented out the family home for his three-year period of tenure.

Given his home was to become an investment property for a few years, he negotiated a change in his home loan from principal and interest to interest-only, with a three-year fixed rate. The deal was that interest would be payable annually in advance, and it would be renegotiated at the end of the three-year interest-only term. The total loan was for $250,000, and it was with one of the major banks.

At the time, Barry was 61. He noticed that the loan had been written on a 30-year term, but he said he didn't make a fuss about it at the time, because the other terms suited him.

This all happened three years ago. Now Barry is back in his original home, and has been making his payments without fail. When the three-year term came up last month, he went to the bank to discuss moving the loan to a variable rate so he could start to make headway in the loan, and hopefully have it paid off when he retired.

Not so, said the bank, you've got a 30-year term with 27 years to run and that's the way it's going to stay. As an old banker he was stunned, and asked the obvious question: "Why would you want to lock me into a loan that can't be paid back until I'm 91?"

He tells me that his words fell on deaf ears. So he approached the Financial Ombudsman service, hoping that they could convince the bank to change its stance. Luckily, the process was quick; within a fortnight the bank had backed down, and offered to change the terms of the loan to a variable rate, which would enable him to pay it off as needed.

But they obviously weren't happy about it, and warned him that he would "almost certainly" be liable for mortgage insurance. He was amazed. Why would a bank that was happy to roll over a loan until the borrower was 91 without asking for mortgage insurance, now look for it just because the loan was to be moved to a variable rate?

In any event, he reckons his house would be worth at least $350,000, which means the loan to valuation ratio would be no more than 70% - comfortably under the 80% threshold over which mortgage insurance is required. What's more, Barry has plenty of money in super, and could quickly withdraw a few thousand dollars to reduce the debt if the bank decided to push the mortgage insurance line.

All the banks received a pasting during the Royal Commission, and the media is now reporting that hundreds of millions of dollars are to be spent on remediation, plus sharing a plethora of motherhood statements from bank executives telling us how much their culture has changed.

That might be fine in theory, but as the above example shows, simple common sense is still way down their list of priorities. I reckon we need a return to the "good old days" when the friendly local bank manager had both the authority and the common sense to make decisions.

Noel answers your finance questions

Question. Could you explain the pros and cons of withdrawing money from super then recontributing it back to super. What advantage is there in doing this?

Answer. There is a tax of 15% plus Medicare levy (17%) on the taxable component of a lump sum superannuation death payout if such sum is left to a non-dependent. By making a tax-free withdrawal from super, and then recontributing it as a non-concessional contribution, you increase the non-taxable component and decrease the taxable component. This means less tax to pay on death.

Question. I retired two years ago. I am 70 and receive a fortnightly age pension of $690 . My wife, age, 60, had to stop work due to injury. We have $500,000 on fixed deposit. We are thinking of using part of that money to buy an apartment for around $350,000 to receive a net weekly rental of $300. Will my pension be reduced if we did that?

Answer. There should be no effect on your pension, because you are almost certainly asset tested now, and you would be simply exchanging one type of asset, cash, for another type of asset, residential property. To me the big question is whether buying an apartment is the right strategy. It's going to get older as you do, and will require increasing maintenance as time goes by. Instead, you could consider placing some money into an index fund, which would pay you around 4.2% franked, plus give you some capital growth. This last-mentioned strategy would free you forever from repairs, rates, insurance and vacancies. Of course, you would need to have the mindset that hangs in there when the market has one of its normal downturns.

  • Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au