How to manage your bank manager… secrets from the inside.
This is gonna sound a little like bank bashing – and there is a reason for that. Simply put…when you go and see your bank manager does he have YOUR best interest at the front of his mind or THE BANKS’ best interest? We know the answer to that one it’s the Banks best interest – otherwise your bank manager is out of a job. Yet the bank manager as an employee of the bank will do his or her best to appear to be your best friend and trusted banking professional who saves you money.
So when your bank manager appears all friendly and uses sales techniques against you – just remember – he or she works for the bank – not for you.
Ok so what are the sorts of things that they do to ensure that they work in the banks best interests?
Bank Secret number 1.
Ok this is something that EVERY bank will do and by doing this will save you THOUSANDS. When you get a mortgage, they will ask how frequently you want to make payments. If you say monthly…
they’ll say ‘No Problems” and continue.
If you say Fortnightly…. they’ll say “no problems” and continue.
If you decide to pay fortnightly (AND YOU SHOULD), when you get your mortgage documents, if you are paying attention and haven’t gone glassy-eyed from reading all the legalese, you will see that they will amortise your fortnightly payments across the year so that you pay exactly the same as someone paying monthly. You pay exactly the same over the course of a year.
Now ask yourself why would they do that? Go ahead – ask your bank manager (and remember that he’ll use sales techniques against you) you probably won’t get the REAL answer…. Here it is.
There is 52 weeks a year, 26 fortnights a year…but only 12 months. So by choosing to pay fortnightly (AND NOT AMORTISING THE PAYMENTS) you are in effect making 13 months of payments in a year. You are making EXTRA payments (even though the difference to you is about the cost of a cup of coffee every fortnight).
By not amortising the fortnightly payments, over the course of a 30 year mortgage, you will make an additional 19 payments earlier than you would normally have done so, and save yourself…72 mortgage payments.
Wait 72??? How is that possible I hear you cry? Because when you start paying your mortgage – for the first decade or so when you make a payment, the largest portion of that payment is paying off the interest – not the principle. Extra payments reduce both the principle and interest portion of the loan – and hence you pay it off that much faster. Don’t believe me? Go ahead ask your bank manager. I haven’t found one yet who’ll give me a straight answer – but they will all blush when they realize they have been caught out.
Bank Secret Number 2 – Banks and interest
DEBT VS LIABILITY
Ok this relates a bit towards Budgeting. Remember when I said that if you want something you plan for it in your budget? A LOT of people of course don’t do that – they use Debt. Debt is VERY different to Liability. Let me explain.
Lets say you want to go away on holidays to Fiji and laze by the pool drinking Pina Colada’s. You haven’t budgeted for it but you really need that holiday and so you use debt to fund it. Debt is paid for from income that you have not yet earned.Remember to take plenty of pictures when you are on holiday – because you will be paying for it for a LONG time if you use debt.
Lets say you borrow money to buy an income producing asset. Lets say property. At ANY TIME if you choose you can sell that piece of property to remove the liability associated with it. This is very different to the holiday in Fiji. You cannot sell your memories and holiday pictures to clear your debt.
What has this got to do with the bank?
Banks prefer you to have debt rather than liability
What? Why would they do that? Because generally debt based products attract a higher rate of interest than liability based products. Your credit card has a high rate of interest in comparison to your home loan. (The bank will tell you that this is because risk assessment says that your credit card is a higher risk of default than your home loan). So why then when you borrow money from a bank do they structure it in such a way as to make it easy to get a credit card, and hard to alter the terms of your mortgage?
Two reasons. 1) With a higher rate of interest they get more money and 2) It limits their ability to lend
You might scratch your head on that last one so here it is in more detail.
Lets say you have a piece of property worth $1M and you want $100,000 to go invest it into the share market. You rock up to your bank manager and make the request and he says something along the lines of…”Hmmm investing it into the market? I’m not sure, let me see what I can do I’ll have to ask head office.” (This by the way if you can’t recognise it is a sales technique). Inside the bank manager is jumping up and down, because for loaning $100,000, they now have as security a $1M asset. This security then lets the bank lend out about a further $812,000 to other lenders. You are most valuable to a bank when you have large assets and small liabilities, because they get to use your assets to make more money on top of the interest that you get charged. Neat eh?
Secret number three – When to borrow from the bank.
I’m probably preaching to the converted here on this forum but Timing is important. It’s important as well when you decide to borrow (or more correctly to receive approval to borrow) because of the way ecomonic cycles work.
Right now (when the share market isn’t great, the economy facing recession, unemployment up etc etc) trying to borrow money is bloody hard. Yet when should we be buying quality assets? When the bulls are running or the bears savaging?
It is of course better to buy quality assets when the markets are rubbish – but as I said, it’s bloody hard to borrow right now. So when should you seek pre-approval on an line of credit against your assets? Answer is when the market is BOOMING. You’ll then have the capacity to invest at the bottom of the cycle that those who don’t have your foresight do not.
Once again be very careful of your bank manager – They will be happy to lend you money at the top of the cycle, just make sure you are getting a facility that you don’t pay interest on unless you draw the funds. You want the capacity to draw, not have the money sitting in the bank account earning less interest than you are paying.