This article was originally published in July 2018
In a previous article I was critical of financial institutions not being very considerate of their own customers. But this time, I am on the banks’ side.
A bank’s job is to get money in from depositors so it can lend money out to borrowers. They make a profit from the difference in the deposit rate they offer and the rate they lend at. It is a pretty simple business really, except when borrowers cannot repay.
I know all businesses need to be responsible in how they engage with customers — anyone in business “should” be considerate of a customers needs, wants, and capacity to consume the goods or services on offer. But just because businesses are selling something, people still need to be responsible for using their own judgement before committing.
Here is a picture of me on that responsible/irresponsible line. I have never ridden a motorbike. An inexperienced, middle-aged man should NOT be learning to ride a motorbike, but I am sure I would be allowed to. Thankfully, I used my own judgement, along with a some subtle words from caring friends (suggesting I would look ridiculous and kill myself), therefore won’t be getting a motorbike.
The coolest bike ever!
How much should anyone borrow?
No one forced this couple to borrow money. Firstly, they made a conscious choice to buy a home to live in. Then they made a conscious choice to buy three investment properties because they were “ planning for their future”.
Only customers truly know what they can afford
To assess an applicant, banks (70%-80% of them) usually apply a Household Expenditure Measure (HEM), which is an estimate of the basic costs of running a household. Here is an article on how the HEM is used in Australia. It is certainly not an ideal way to assess everyone, but it is a start.
Only customers themselves will ever know their true expenditure. A few hours looking through bank statements is enough for anyone to get a feel for their cashflow. But most people don’t.
This may sound harsh, but if they are responsible enough to get jobs, buy a home and then decide to buy three more properties, they should have the basic skills to allow them to figure out if their credits exceed their debits.
When people ask about tips and secrets for financial success (because I should know) I often jokingly reply:
The secret to financial success can be as simple as spending less than you earn.
The claim against Westpac and the client’s own admission
The claim against Westpac is as follows:
We claim that Westpac breached the responsible lending laws when they issued the Tates with a number of mortgages and a total of around $1.6 million in credit in circumstances where they were earning a very modest living and they had almost no surplus income when you take into consideration their true expenses.
The claim itself acknowledges the client’s very modest earnings and almost no surplus income. The customers themselves said:
The Tates said they realised they placed too much trust in the bank to assess whether they could afford the loans.
Are both sides at fault?
There is no denying that banks want to lend money, and as the Royal Commission is showing, they have not done a great job at responsible lending in some cases. And as lending staff are incentivised (either financially or psychologically) to lend money, they will of course encourage borrowers to feel more favourably about their capacity to meet all their expenses.
In this case, both sides are probably guilty of not stopping and questioning harder whether the loan was wise. But why would they, what could go wrong? (see below)
In a free society, where choices are being made by able-minded adults, we all must take more responsibility for our own actions. That approach covers not just finances but pretty much everything (including motorbike buying).
It is only the beginning of stories like this unfortunately
I am sure there are only going to be more and more stories of borrowers not truly understanding their financial positions, just when banks start to impose much stricter lending criteria, in line with property price declines.
Who said Australian property prices always go up? Well, they have for the last 30+years so why should they stop now?
This article is the opinion of the writer and does not consider the circumstances of any individual. This document has been prepared by Peter Keogh (Authorised Representative No. 253538 of Paragem Pty Ltd AFSL 297276) and is intended to be a general overview of the subject matter. The document is not intended to be comprehensive and should not be relied upon as such. We have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained in this document. No responsibility is accepted by Peter Keogh, Paragem or its officers.