Banks provide us with an essential service – they take deposits and loan money. This is a service that is integrated in our everyday lives, we need them. But lately the banks are implementing policies that try to paint themselves as the good guy, putting their customers interests ahead of their own in this time of COVID-19. But this really isn’t the case!
Now you are probably thinking I am going to start bashing the banks and I’m not. Like I said, they provide us with an essential service. I am both a customer of banks and an investor in banks. But let’s not forget their primary objective – to make a profit – that has not and will not change.
As someone who believes in capitalism, there is nothing wrong with making a profit. It provides a return to shareholders, creates jobs and tax receipts and is overall good for the economy which, in-turn, is good for the people. However, this notion that banks are your friend, is just marketing dribble. Let’s look at some of the “good guy” policies they have put in-place in light of COVID-19.
Ability to cease repayments
Most banks are allowing their customers to cease mortgage repayments for up to 6 months if they are unable to meet their loan obligations. If someone is really suffering financially, this is a good option. But be very aware, this is not an interest free holiday!
The interest over the period of no repayments will be capitalised on top of your loan. What this means is that, instead of you paying the interest each month, it gets added on top of what you owe. Your loan balance will continue to grow.
The scary bit about this situation is that you start paying interest on interest on interest. This is compounding working against you and can add up quick!
So while it is a good option as a temporary relief for those people who have lost income due to the virus, this does not benefit your overall net asset position. The banks aren’t doing you a favour, they’re not missing out on any interest, they are simply taking it from your loan balance.
If you are in this situation, try to get some income flowing back in asap so you can restart repayments.
Automatically reverting repayments to the minimum
The newest “good guy” tactic is that some banks are automatically switching their customers repayments to the minimum. The idea is that this will reduce the amount you are paying towards your debt, which will free up cash flow, during this time of COVID-19.
You have always had the option to do this but it has been on an opt-in basis, i.e. you have to request repayments to be switched to the minimum. In my opinion, to do this automatically, across the board and without consent, is just cheeky!
By switching repayments to minimum you are going to be in debt longer as the rate you are paying it down has just dropped. The longer you stay in debt, the more interest you pay over time.
This is a very calculated move by the banks because they know that most people, who have the income to continue making a higher repayment, are ambivalent about their finances and likely won’t change it back. This means that the debt is dragged on longer and the amount of interest receipts collected by the banks goes up.
Not giving existing customers the best rate
This is not new. Banks have been doing this little trick for years. If you have an existing home loan with a bank you generally start out with a pretty good interest rate as they are competitive at the time of application to win your business.
Over time the products that banks offer change and interest rates change as a result. If banks really cared for you, you would assume that they would continue to keep you updated with the best rate they have, right? Well this is not the case.
If you are not constantly reviewing your rate, and actively asking for a better rate, you will likely be paying too much. In most instances banks will not automatically pass on the best rate.
Many of the products they offer have a honeymoon period where it is a cracking rate for the first couple of years then it reverts back to the standard variable rate. Again, this is a trap that preys on ambivalent people as they likely won’t review their rate and subsequently end up paying a whole lot more in interest than they should be!
Are banks the devil?
No. Banks aren’t the devil, they are just a business trying to make a profit and there is nothing wrong with that. However, as a consumer you need to be aware of this.
The whole notion of being loyal to a bank is just crazy to me. Banks provide a product and service and while that continues to be the most suitable product or service for my situation, I will continue to use it. If not, you better believe I will be changing to a more suitable bank.
No matter how much marketing money banks spend trying to get you to believe they are customer focused and loyal, this is just not the case. Banks will be banks. The only people they are loyal to is their shareholders which is why it’s often better being an owner of bank shares than a customer!