The banks in Australia are very profitable, and that money may be coming from your pocket. Here are 5 ways that you might be contributing to their profit and what you can do about it.
Making the default 30 years
If you take 30 years to pay of a $500,000 you will end up paying $1,200,000 back to the bank. Compounding this is that you will probably upgrade your house at some point and reset the 30 year timer. There is an old, pretty lame, banking joke about Commonwealth’s banks logo, and that is that the black bit is what you borrow, the yellow bit is what you pay back.
To overcome this problem, you need to research various strategies that help pay your home loan off quicker. Check out GPA Financial Planning's Seven Steps to Smash Your Home Loan
Lend you too much
What’s the first thing you did when you were thinking of buying a house? Was it to try to work out how much you can afford? Did you work it out or did you ask the Bank (or ask the loan salesman/used their online calculator)? Are the banks going to make more or less money off you if they lend you an amount where you have to scrape by for thirty years, barley able to make minimum payments while sacrificing your living standards?
To overcome this problem, whenever you think about taking on debt make sure you do your own budget projections.
Push credit cards for day to day spending
Instead of paying for your groceries immediately, stick that money in your offset account, save some interest and then pay for the groceries in 30 days. On paper, and for some people, this works well. But in my experience the banks make money on you here in two ways:
- You forget to make the payment on time. We all get busy. If you are one day late... BANG! The hammer drops and you get slugged with an interest bill.
- You spend a little more than you want to every month, but you don't realise until after the money is spent and you go to pay the credit card bill. A credit card does not impose the same psychological limits that a dropping bank account does, and I am sure the banks know it.
To overcome this problem, get a structure that helps you spend what you want to spend and no more. Check our chapter 3 in our free ebook: Smash Your Home Loan
Vertical integration is banking lingo for employing the financial adviser to ensure when they recommend a product that it is most likely theirs. They then pay these advisers based on how much debt, investments and insurance they recommend. The obvious problem is that some (not all) bank advisers are paid to sell, so that that is what they do. The not so obvious problem then becomes that you might think financial advice is just a recommendation about insurance or investment products (it is not!)
To overcome this problem, you need to make sure you know how your adviser is paid and make sure the focus is on strategy not product selection.
The interest rates
Is anyone paying the “standard variable rate”? I doubt it, you are on some kind of package (wealth, advantage, choice or whatever you bank calls it). Then you probably have a discount on top of that. Makes you feel like you have a good deal and it is not worth looking around.
Or you may have been convinced to pick you current bank by a honeymoon rate. A temporary really good percentage that will disappear at some point, at which point the banks hope you are too busy or lazy to change when the interest rate becomes not so good.
The other trick they have up their sleeves is fixing the interest rate/loan. They are not doing you a favour. They think they will make more money off you if they lock you in. This might be because they have a prediction on the future movement of interest rates, or because if they lock you in for 5 years then they are guaranteeing you can’t move to a better deal.
One of the solutions to this is summaries in chapter 7 of Smash Your Home Loan.