Banks now helping borrowers save money
It's hard to believe but it's true. Banks and lenders are telling people how to save money on their biggest financial commitment - their home loanuc
Sunday, June 4th 2000, 12:00AM
by Paul McBeth
In the past the general attitude has been that banks are bastards and they are just out to make as much money as possible from one of their main lines of business - mortgage lending.
They'd sell you a basic loan, probably on a floating rate, and then they'd move onto making the next sale and generating a bit more profit for their shareholders.
Now though New Zealanders are seeing an unusual thing. Some of the big mortgage lenders are offering to help you save costs with your mortgage. The two most recent instances of this apparent bank generosity are WestpacTrust, which says it can help you save up to 40 per cent on your interest costs, and AMP Banking which is doing an advertising series with author Martin Hawes showing people how they can better manage their mortgage.
Such a move hasn't come a day too soon as New Zealanders have been steadily increasing their household debt levels over the past decade, and they are collectively paying hundreds of millions of dollars each year in interest payments.
The need for better lending behaviour is made clear in a recent study by AMP Banking that reveals we are poor mortgage managers.
The survey of 300 people in six metropolitan centres reveals that there are three main areas where New Zealanders let themselves down with mortgages.
- They spend very little time shopping around for the best deal in town, (despite heavy advertising campaigns from lenders)
- Most borrowers go with the simplest mortgage arrangements, either a fixed or floating loan
- Hardly anyone regularly reviews their mortgage.
These findings are quite stunning when put into context against how people manage the other side of their personal financial balance sheet, that is their investments or assets.
With investments people tend to have a pool of money which is diversified across different asset classes, plus they pay regular attention to what their investments are doing. Checking the balance is common and if one type, say an investment in a listed New Zealand company, is not performing and there are better opportunities elsewhere they will shift their money.
Do they do that with mortgages?
No.
AMP's survey says that just 4% of mortgage lenders review their loan regularly.
"The majority of respondents appear to take a hands-off approach to mortgage management, only reviewing their mortgages when triggered by large events such as significant interest rate changes, or buying or selling a property," AMP Banking marketing manager Karen Clough says.
Research also shows that when it comes to investing people do spend a lot of time shopping around looking at what is available, and trying to find the deal which best suits them.
The survey shows people have quite a different attitude to mortgages, compared to investments. It says that while nearly three-quarters of respondents said they would talk to two or three providers when setting up a mortgage, actual behaviour differed.
On average, respondents had consulted only 1.3 information sources when they took out their last mortgage with more than half (57%) talking to their existing bank, and less than two in 10 approaching another lender or a mortgage broker for advice.
A similar survey in Australia showed that the average time taken to find a loan was 28 hours, spread over eight weeks at a cost of A$305.
The reality is that New Zealanders aren't sophisticated mortgage users, rather as Loan Plan business manager Martin Shepherd says we are just credit machines. Borrow the money the easiest way possible to buy something and pay later.
Mortgage Brokers Association executive committee member Cherie MacFadyen says one of the issues is that New Zealanders aren't actually used to all the different types of loans which are now available, nor are they used to the techniques which can be used to lower the overall cost of a mortgage.
For instance one doesn't have to cast their mind back too far to remember the days when there was no real choice of mortgage. What was offered was a principal and interest loan, and the biggest decision (which was generally dictated by the banks) was whether it was a table mortgage or a reducing one.
Now there are floating and fixed rates, revolving lines of credits, split loans and more.
MacFadyen says while New Zealanders may not necessarily be shopping around for the best deal, someone who uses the service of a mortgage broker will be offered a far greater range of mortgages and services than if they did it themselves.
Shepherd says mortgage lenders, until recently, have not been proactive in advising lenders how to repay their debt early.
"They have wanted them to keep their mortgage forever," he says.
However, that all changed several years when businesses focussed on helping people save money on their mortgages by rearranging their finances sprung up all over the country.
Shepherd says that while the banks are now offering these types of services, lenders are still poorly educated about the options that are available to them.
"Investors don't understand how a principal and interest style mortgage works," he says.
His view on the lack of understanding is shared by others including AMP Banking general manager Gary Morrison.
He says people need to spend more time learning about mortgages and lenders have to make their products easier to understand and hassle-free.
In the survey 39% of respondents agreed that they could save money by restructuring their mortgage, yet they weren't doing it.
A number of reasons were put forward, including the belief that a restructuring of their mortgage would cost too much money, that the process would take too much time and effort, and that they had insufficient income to restructure.
Morrison says a few simple tips, such as increasing the frequency of payments from monthly to fortnightly, or paying off slightly increasing the level of repayments can have significant positive impacts on the overall cost of a mortgage.
Why are banks and mortgage lenders being so-apparently generous at the moment and telling you how to save money?
The underlying reason appears to be that the mortgage writing market has dried up as house sales have slowed.
After a period of significant growth in the number and volume of residential mortgages, things have flattened off and mortgage writers have now shifted their focus from competing for new business, to competing for market share amongst existing players.
There seem to be two tactics used to encourage people to shift. Firstly, there is the line 'come to us and we will save you money'. The other is the approach that Bank of New Zealand have taken with Global Plus where they say come to us and we will, effectively, give you a free holiday by giving away air points.
Perhaps the good news is that we are not alone in this area. A survey conducted by eChoices in Australia last year showed that there are plenty of other things Australians would rather be doing than looking for a mortgage.
It said finding a home loan rated down the bottom with renovating the bathroom and visiting the dentist. Having sex and taking a holiday proved the most enjoyable
Well if you manage your mortgage better you can have more of the things you enjoy.
Paul is a staff writer for Good Returns based in Wellington.
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