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90 Marine Terrace Fremantle, WA, 6160

Poor Financial Knowledge Makes You Poor

When it comes to money, we set ourselves up to lose. Or more specifically, the system sets the uneducated borrower up to lose. They don’t say knowledge is power for no reason, and this is especially true when it comes to matters of finance.

Lenders seldom offer any trustworthy advice on how to repay a mortgage faster. Why would they? It’s in their interests NOT to. A quick look around a dozen bank and lender websites and you’ll come across ineffective help like ‘make weekly or fortnightly repayments’, ‘use an offset account’ or ‘shop around for the lowest interest rate’. This advice is unhelpful and makes little difference to how rapidly a borrower can repay a loan. Paying fortnightly means you make the equivalent of one extra repayment per year – Wowzer! Good luck paying off your mortgage in 20 years with advice like that. If the loan is for 30 years, the loan is for 30 years, irrespective of the frequency of repayments, unless you stipulate otherwise.

Case in point; 2019 saw successive cash rate cuts by the RBA and if you understand basic economics, you know, among other things, that decreasing interest rates are a sign of a sluggish economy. The same thing was happening around the globe and interest rates were widely predicted to continue dropping. As a broker, the last thing I would suggest to my clients would be to lock in or fix their mortgage interest rate in that kind of environment. I sent three emails to my database warning of the downsides to fixing at that time.

What was worrying is the feedback I received from customers who were choosing between me and a bank. According to many borrowers I spoke to, banks were enthusiastically encouraging their potential and existing customers to fix their home loan for two or more years at rates like 3.19%. In contrast, myself and the best Perth Mortgage Brokers were saying the opposite thing – It didn’t make any sense to any lending expert I know to lock a client into a fixed rate when there was a high chance the RBA would drop the cash rate again in the short to medium term.  

It’s a real shame we lost a few clients who were convinced to fix. At the time of writing, they could have borrowed the money for 2.09% fixed for two years. On a $600,000 mortgage that’s an interest cost saving of $12,900 and $5,500 off the principle balance during the fixed period. I’m pleased to say not one of my clients made this mistake and they are richer for it. But this highlights the dire need to educate ourselves about borrowing, money and economics if we are to be successful in managing large debts like a mortgage. This is a basic, but useful example of the urgent requirement for higher levels of financial education. 

The Royal Commission showed the systemic failures within the Big 4 banks. Home loans can be mis-sold. Very few people understand exactly how a home loan works, what all the terminology really means and lots of people stuff it up. Before you borrow a cent, make sure you school yourself on home loans. Speak to your richest friends about your plans. Surf and read good info on the Net. Get yourself an independent mortgage broker with a good economic and finance brain who can be trusted to give impeccable, specific advice that will help you repay the debt. Don’t be ignorant and lazy and head straight to your current bank, find yourself a trusted adviser.

How do they get away with it? Well, it would be naïve of us to point the finger at banks and lenders and blame them for keeping us in debt for 25 years. Most borrowers people put little effort into their financial education. Have you personally read a book about finance or money or business in the last 12 months? Didn’t think so. You can’t blame anyone else if you haven’t put in the effort to learn the rules of the game. And this is one game you really want to be good at. The average borrower is not interested in becoming educated in the practical handling of money and this leaves them vulnerable to becoming a victim of the system.

These people who were convinced to fix loans only have themselves to blame and they’ll be wasting thousands of dollars because they didn’t take responsibility for their financial education. It’s not like money is some hideous purple, 18-tentacled monster, far from it. We can’t operate commercially and trade without it. It’s just that most people don’t understand basic money concepts like budgeting, frugal spending, saving, investing or managing debt. People tell me they want to be wealthy but do nothing about it. They take no action. They’re just talking shit.

A client in the market to borrow more than $1.5m for a new purchase kept sending me text messages asking for the repayment for different amounts of money. Surely, if you’re about to borrow 1.5 million bucks you can find a loan repayment calculator online (like the one on this website) and work this elementary stuff out yourself, even if it’s just to double check what I or your trusted Mortgage Broker are saying!

Few borrowers have an understanding of how a mortgage really works – for and against you. Most think they do, but actually, they don’t. Mortgage and credit management is a learned skill. So now’s the time to get up to speed, and you can get a giant head start on this by booking a call with me here.

Here’s to YOUR Financial Security,

Brodie Brown