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Thinking of switching your mortgage to another bank?

TSB bank logo

TSB bank logo

I noticed a Facebook ad today from TSB Bank touting a 15 month fixed rate of 4.95%, $1000 toward cash for your troubles plus an ipad or iphone. Sounds great doesn’t it?

But watch out for the T&Cs because all such offers come with strings attached. I’m not picking on TSB here because all the banks send this kind of message out from time to time. But I just want to remind readers of some of the things to think about before you leap into bed with a new bank and a new mortgage.

Can you do better with your current bank?

A lot of the time you can, actually. A large percentage of customers have the ability to change easily and the banks know it so let that work for you. You don’t need to threaten the bank with your pending departure unless you’re that way inclined. Talk to them. Tell them what you want. Chances are you may not need to change at all.

If your bank won’t budge, consider the costs

One of which is the fact you have to meet the new bank’s lending criteria. This might be harder than you think especially if your situation has changed since you took out your current mortgage. A mortgage broker is ideally placed to give you some advice on your chances of success (and to handle the process for you). Just remember you have to get through the assessment process.

These days banks are throwing cash at you to change to them and this can help offset the legal cost of doing so. But do the numbers on it. The new interest rate you get has to be substantially better to make the change worthwhile. Why would you change for a piddly $10-15/month reduction in your payments? Don’t get me wrong, a dollar is a dollar. I just think if you’re looking to save pennies then there are probably easier ways to do that (like having one less coffee a week).

For those with less than 20% equity then there is also a low equity charge to think about and this can add up. It’s either charged as a lump sum (and added to your mortgage) or your interest rate is increased anywhere from 15 to 50 points (50 points is like going from 5.00% to 5.50%). This specific charge is usually what stops most people in their tracks.

Most people stay put

Because the numbers just don’t work out. For those that do change it’s normally because they’ve gone to their bank with a specific proposal in mind and been turned down. So they’re looking for an alternative.

My advice – before you rock up to the new bank get some info and crunch some numbers. Or have us do it for you. We’re here to help you with decisions like this.

My bank doesn’t understand small business

If you’re a small business owner you may have heard this one before. You may have even said it once or twice!

A few weeks ago we workshopped a case with National Bank where the business owner was looking for a loan to ‘tidy up a few bills’ and to fund a little expansion plan she had in mind but the bank weren’t so keen. It was hard to understand because the business was able to show a nice upward trend in sales and profitability over the last few years. That’s a pretty good story against the backdrop of an economic recession.

But digging a little deeper into the financial accounts highlighted some issues which made the bank less enthusiastic

  • stock levels had doubled and so had the length of time it took to sell her goods
  • the time taken to pay her suppliers had doubled and it was taking longer for her to collect invoices she was owed as well
  • Solvency was getting worse

From a bank’s perspective a worthy borrower is not only profitable but also has sufficient cash flow to pay its bills on time (one of which and usually the biggest will be a mortgage to the bank). In this example the bank can see plenty of profit but poor cash flow and throwing money into expansion and to pay suppliers wouldn’t really do anything to solve that problem. In fact by increasing expenses it could make the problem even worse! Why would a bank support that?

In this case the bank did actually come to the party. But how?

Basically the owners initial proposal had missed the mark by talking about how the business would generate increased profit and how wonderful that would be. But it failed to talk about the cash flow problem and how that was going to be addressed.

The new proposal included using a daily deal site to move the excess stock and get some cash in the door. A system was set up to give a discount against future purchases for customers who paid within a short timeframe. A payment plan was worked out with the two large customers who were taking longer to pay. And in conjunction with the accountant some realistic numbers to support the plan were put together. It worked.

Lessons learned?

Keep an eye on your accounts and get a good book keeping system like Xero so you can punch out regular reports and monitor this stuff.

A bank is a bill and like you, it wants to be paid on time. Remember profit is nice but cash pays bills.

Banks do actually understand business pretty well and do support self-employed people.  But they have very little time for owners who don’t understand their own business.

Resist the DIY approach to lending and get a broker to help you. A good broker will address any issues and tailor your application to suit.

Mortgage advice

Two interesting scenarios have come across our desks in the last 10 days and I hope they demonstrate to you why you would use the go2guys as your mortgage broker over the DIY approach.

In the first case we suggested to a couple that they tidy up a handful of things (especially their account conduct) before we  bothered to approach a bank on their behalf even though there were some real strengths to their position, not the least of which was a great level of income. The basic problem was they were clearly spending willy nilly and living outside their means. One of them was particularly forthright and decided to totally ignore our advice and approach their bank directly. I heard about the result through a friend of theirs (also a client). Yep, you guessed it – an embarrassing decline. What’s worse, we know that lender is a really good fit for them once they’d tidied themselves up. But they’ve blown their chances in the short term.

In the second case a prospective client had been recommended to us from a friend (again, the friend was a client) and after a quick look at the situation we determined that the current bank was not the right lender for what they wanted to do as they didn’t meet that bank’s lending criteria. Despite our advice the prospect felt stongly that their established 15 year banking relationship demonstrated loyalty and that that loyalty would ‘surely’ be rewarded with an approval. It wasn’t. .

I mention these examples not because I want to say ‘I told you so’ but because they’re a demonstration of the value we provide in helping you get the best mortgage available. We’re trying to give you as many aces as possible so that when your application lands on the credit manager’s desk they can see you’ve got a winning hand.

Although most people think the best mortgage deal comes down to interest rate and various loan features the reality is that the interest rate on offer doesn’t make a skerrick of difference if you can’t get the loan approved in the first place.

Talk to us – we deliver!

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