Home owners who are diligently paying off their mortgages are entitled to a degree of self-satisfaction. Through their thrift and toil they are contributing to the wellbeing of their families, communities and the economy.
So why has it suddenly become fashionable to portray home loan borrowers as ignorant, foolish and indolent? Such epithets are usually the conclusions to be drawn from surveys purporting to provide a snapshot of the typical borrower.
The latest is a survey of 900 borrowers by UBS analyst Jonathan Mott who found that one-third of customers with interest-only loans either “do not know or understand that they have taken out an interest-only mortgage”.
“Approximately one-third of borrowers who have taken out an interest-only mortgage have little understanding of the product or that their repayments will jump by between 30 to 60 per cent at the end of the interest-only period,” Mr Mott said.
UBS predicts that “many borrowers may face substantial stress as interest rates rise or when they revert to principal and interest”. While “concerned” that many borrowers are not prepared for this, UBS adds that “mortgage mis-selling and responsible lending obligation risks cannot be ignored”.
The Australian Financial Review could not resist a poke at borrowers in its coverage of the story: ‘A third of borrowers are clueless’, it ran on its email bulletin.
Mr Mott simply observed that his research “needs to be considered in the context of the lack of financial literacy in Australia”.
The numbers on financial literacy
A survey by ME bank found that 35 per cent of consumers had never taken steps to educate themselves on banking products and services.
Among the gaps in banking knowledge identified by ME: 74 per cent don’t know what a home loan comparison rate is; 58 per cent don’t understand the advantages of a personal loan over a home loan or credit card; and 42 per cent don’t understand compounding interest.
ME’s head of deposits and transactional banking Nic Emery says some Australians find banking “dull and complex”, while others find working with numbers difficult and “put their head in the sand”.
“Like it or not, banking is part our daily lives and understanding the basics is a life skill,” Mr Emery says.
There is no denying that better informed consumers make better decisions and it’s equally true that borrowers should be more aware of their commitments, particularly when it comes to big-ticket items like home loans.
But ultimately the onus should be on the banks to clearly communicate with and continuously update their customers.
It’s as easy to borrow $1 million as it is to buy a car: that’s as it should be in a deregulated economy, the market purists will argue. Perhaps, but it is ludicrous that someone can leave a lender’s office with $1 million in their pocket but with little idea what this means for their future.
This is a nervous time for home owners struggling with mortgages. With household debt at record highs, stagnant wages growth, employment security at record lows, a flat economy and the inevitable rate rise by the Reserve Bank, it will take just the smallest adverse movement to send mortgage holders to the wall.
This is not the time to be calling on “clueless” home owners to brush up on their knowledge of compounding interest.
It is time for banks, in particular the big four, to take some responsibility for the large burdens taken on by their home lending customers.
Given the fees that banks charge their mortgage customers there is no excuse for banks not to constantly update loan customers of their options and what they mean for their repayment obligations.
If there really is a problem with consumers’ financial knowledge then banks are the best placed to do something about it.