There are many talking heads on TV and radio. Newspapers are filled with those giving us advice on how to manage our money, how to think, who to vote for and what to say.
Amongst all the rubbish that passes for news or commentary the latest fashion is to bang on about wages growth (or the lack thereof). A topic we’ve been highlighting since Thyme Financial Group took its first corporate breath way back in May 2015.
Rather than repeat the nonsense in the mainstream media, I thought I would highlight an issue that we quite often see but – to my powers of observation – have yet to see anyone write about. Given there are acres of economic data about record levels of household debt and low wages growth you would think a wily economist would string the two of these numbers together and it would be a major news item – or perhaps an election issue.
The issue I’m referring to is this. In the absence of wages growth and continual rise in the cost of living, people with homes have been slowly increasing their home loans. The reason for this? They’re using the equity in their homes to survive – ie, to pay for the weekly groceries, the power bills, the medical expenses, the car lease, the petrol, the expenses relating to their children…you get the picture.
Again, as I often do with these articles, I should highlight that I’m not an economist. My arrival at this conclusion is merely from the increasing number of clients we see who are behaving in this way (so it’s a small sample size).
Let me provide you with a few examples that were walk-ins recently.
Couple 1
He has a job that pays him $35k p.a. and she has a job (which is casual) that currently pays her $65k p.a. They have an investment property in the outer ring suburbs of Sydney and lease a high powered European sports car. They want to increase the LVR on their current mortgage (on the investment property) to pay for an important social event in their lives.
Couple 2
He is on $190k and she on $50k. They own their home in an affluent Sydney suburb. They had a manageable mortgage until he lost his job during the GFC. They survived by drawing down on their mortgage (as it was a line of credit) until they exhausted it. They have maxed out credit cards and have significantly damaged their credit rating score. There are lenders that we can place them with but at a higher interest rate than banks.
Couple 3
Own numerous investment properties around the country (more than 10) and have “achieved” this by revaluing existing properties and drawing to the maximum limit available to them. This strategy worked until the banks started to increase rates on investment and interest only loans. They now face a 20% increase in their annual interest bill. Guess what they’re doing. Yup, paying their investment loan repayments with their home loan – which is almost maxed out.
Couple 4
He was on $500k p.a. until he lost his job during the GFC. She was forced to go out and work and secured a job for $40k p.a. It took him two years to secure another job at a quarter of what he was on – by which time their mortgage had doubled in size. He chucked that in and started his own business which for two years earned him almost nothing. Their mortgage is now manageable because they sold assets. They’re in their mid-fifties and still have a small mortgage but have access to three times what they owe. He is a former banker and he will never again not have a liquidity buffer.
There are more but you get the picture.
Why am I highlighting this issue? For the last couple of years brokers and banks have been accused of securing lending for their clients that was greater than their immediate needs. The one thing these articles don’t get right is that clients are asking for as much liquidity as they can get in anticipation of hard economic times.
There are many reasons for this but job insecurity, stagnant wages growth and increased costs of living are the ones cited to us most often.
Last week, NAB responded by limiting borrowing to 6 times a couples’ annual income – we expect other banks to follow. This will work for a while until the market (usually in the non-bank sector) finds a way to offer more to clients. Our advice to our clients is always (and it appears on our website’s top tips) don’t borrow more than you need. But the clients in the examples above will always want a liquidity buffer to survive no matter what our advice.