Pre­pare for credit crunch

The days of cheap, fast money are com­ing to an end, so get ready now for the squeeze

The Courier-Mail - - MONEY SAVER HQ - David & Libby Koch mon­eysaverHQ edi­tor Tim McIn­tyre; email tim.mcin­tyre@news.com.au, tel (02) 9288 2226

RECORD low of­fi­cial in­ter­est rates are set to con­tinue un­til at least early next year, job growth con­tin­ues to be strong, in­fla­tion low and eco­nomic growth solid.

Eco­nom­i­cally it all looks pretty good at the mo­ment. But don’t be fooled: A good old­fash­ioned credit squeeze has been form­ing and it looks like it is build­ing mo­men­tum.

While money will stay his­tor­i­cally cheap, it will be­come harder to get.

The days of cheap, fast money are end­ing quickly. This new money world will come as a shock to many, es­pe­cially as it gets more se­ri­ous. It’s all be­cause of a range of fac­tors, in­clud­ing:

REG­U­LA­TORS are clamp­ing down on bank-lend­ing prac­tices, de­mand­ing more con­ser­va­tive cri­te­ria be­cause of their high ex­po­sure to home lend­ing.

THE fall in prop­erty prices is forc­ing banks to re­assess the se­cu­rity needed to sup­port loans.

BANK fund­ing costs are ris­ing as in­ter­est rates in over­seas mar­kets are in­creas­ing.

BANKS need to raise more cap­i­tal to sup­port their loan books.

All this means it will be harder for Australians to bor­row. We’ve al­ready seen the start of the rip­ple ef­fect, with banks de­mand­ing higher de­posits from home loan bor­row­ers and for­eign in­vestors forced to pay higher bor­row­ing costs.

The next ma­jor rip­ple ef­fect, which is ex­pected in the next cou­ple of weeks, will be thou­sands of in­ter­est-only bor­row­ers be­ing forced into prin­ci­pal and in­ter­est loans. It will come as a shock for many bor­row­ers that the bank can change their loan (which they can) and it will mean higher re­pay­ments.

So here’s our guide to pro­tect­ing your­self against a credit squeeze.

STRESS TEST YOUR LOANS

All banks stress test their loan book for a change in the econ­omy, in­ter­est rates or the hous­ing mar­ket.

You should fol­low suit and be stress test­ing your per­sonal fi­nances in the same way.

That means hav­ing a re­al­is­tic house­hold bud­get for the next year, and also hav­ing a worstcase sce­nario bud­get if things go sour. Have an ac­tion plan of what needs to be done in a worst-case sce­nario. Bet­ter to be pre­pared for global shocks than to be caught un­awares.

Start un­der­stand­ing all the loans you have and what assets they’re se­cured against. For ex­am­ple, com­pare the value of your mort­gage against the value of your home. In this era of fall­ing val­ues in the ma­jor prop­erty mar­kets, if the eq­uity in your house is less than 1020 per cent, your fi­nan­cial in­sti­tu­tion will be watch­ing closely.

So try to use spare cash to get ahead on re­pay­ments to show you have ev­ery­thing un­der con­trol.

If you have an in­ter­est-only home loan, use the re­pay­ment cal­cu­la­tor on your bank’s web­site to see how much re­pay­ments will change if you are forced into a prin­ci­pal and in­ter­est loan.

Slot the new monthly re­pay­ment sched­ule into the house­hold bud­get to make sure it can be cov­ered … or make ad­just­ments to cope.

Con­sider switch­ing to a fixed-rate, fixed-term loan if that is more ad­van­ta­geous.

If things look re­ally bad, con­sider sell­ing assets (shares and in­vest­ment prop­erty) to raise cash to pay down debt.

But make sure you get pro­fes­sional ad­vice first.

With un­se­cured credit, such as per­sonal loans and credit cards, keep on top of re­pay­ments and show good pay­ment habits.

Th­ese are all sig­nals banks will be look­ing at when as­sess­ing the credit wor­thi­ness of their cus­tomers.

PRO­TECT EX­IST­ING LINES OF CREDIT

Ac­cess to credit is go­ing to get a lot harder as banks cope with the un­cer­tainty caused from the tight­en­ing of reg­u­la­tions and the in­creas­ing costs of fund­ing.

At a re­cent func­tion, the boss of one of our big four banks told their top clients: “If you’ve got money to put on de­posit, we are go­ing to love you, but if you want a loan, we don’t want to know you.”

As lend­ing cri­te­ria tight­ens, cap­i­tal re­quire­ments rise and over­seas fund­ing be­comes more ex­pen­sive, banks won’t have a lot of spare cash to lend.

There­fore if you have an over­draft or line of credit, keep it un­der con­trol but don’t get rid of it, be­cause that may be the only credit you get.

We’re hear­ing lots of sto­ries of peo­ple who pre­vi­ously had no trou­ble get­ting loans, hav­ing their ap­pli­ca­tions re­jected.

BE NICE TO YOUR BANKER

This is an ex­ten­sion of the last tip be­cause, from now on, bankers will not be hos­ing money at old or new clients like they have been do­ing over the past 10 years. They are un­der in­struc­tions to go through each client and sat­isfy the bank’s credit depart­ment of their fi­nan­cial sound­ness.

If you are ex­pect­ing any fi­nan­cial glitches in the next cou­ple of months, fore­warn the bank and pro­vide a plan of how you in­tend to get back on track.

This is par­tic­u­larly crit­i­cal if you own a small busi­ness. That means it’s up to you to keep your bank man­ager in­formed as to how the busi­ness is go­ing.

Do what­ever you can to make sure they have con­fi­dence in you. You’ve got to have your bank man­ager on your side.

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