Latest / Money Grows on Trees / #355 - Major Banks Are About To Crush Australians... Move Your Money Now!

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#355 - Major Banks Are About To Crush Australians... Move Your Money Now! · Money Grows on Trees

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  Something very strange is happening at Australia's major banks right
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  now. Most people think when banks cut rates and offer bigger loans, that's
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  good news for borrowers. But the reality is mortgage applications just
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  collapsed 20% at Westpac and 15% at
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  NAB. And when customers stop walking in the door, banks don't get
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  generous because they care about you, they get generous because they're desperate.
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  I'm Lloyd J. Ross, seven-figure investor and entrepreneur, and I've helped thousands of everyday Australians, Americans,
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  New Zealanders, Canadians, and those in the UK to get out of debt and build real
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  wealth. And in this video, I'm gonna show you exactly what the banks are
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  doing with 40-year mortgages, 15-year interest-only loans, and
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  5% deposits. The trap math behind every single offer
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  and the exact moves to make with your money this week before it costs you.
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  Firstly, the collapse that nobody's really explaining. Here's the facts in order. Number
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  one, Westpac mortgage applications are down 20%. That's
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  huge, that's a fifth, that's massive. So it's from $29,000 a month
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  roughly to $26,000 between May and July. Investor
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  applications are down a massive 26% because
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  of the changes to the tax legislation that Labor's implementing. Owner occupiers
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  are down 18%. That's a combination of interest rate rises from the RBA and
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  the changes in legislation by Labor government. Applications were already down
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  11% before the budget, so that's just exacerbated it. The second thing is NAB
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  is down 15% as well in application. So it's not just one bank,
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  it's all the banks. Over the June quarter, right, the applications fell just in the June quarter
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  by 9%, crazy. So here's the thing with the market. What it's saying
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  and suggesting is that you can see this in the share price
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  of the banks, right? So Westpac bank shares fell 5% and
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  then it dragged some of the other banks lower. Here's why, because
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  70% of Australia's mortgages are written by the banks. So
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  when you see a demand shock, which is this, the demand shock, it
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  hits effectively all the major banks because they control 70% of
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  the mortgage market. And they're also got their own forecast that they bring
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  out. Housing credit growth, that's mortgage growth, to fall from
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  what was 6.8% down to 4.7% next year. Check this out, investor
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  lending, halving. So from 9% to 4.5%. So
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  you can tell that if that's halving, it's
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  gonna have a knock-on effect to the pricing of housing too, because
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  the demand's falling away for applications. The debt demand
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  is falling. So you can see the pre-framing of
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  a housing correction. It's happening. What's interesting is that Westpac
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  also raises provisions for bad and doubtful debts, which is
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  what the banks do. When they can see certain things happening in the economy, they'll provision
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  for bad and doubtful debts. That's people that default on their mortgages. and they've also added
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  a bigger buffer, which is why it's a little bit harder to get loans too,
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  right? And so the bank's core growth engines has
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  been mortgages for decades, and it's stalling, right?
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  Because they know one, households are stretched through the
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  cost of living, and then not to mention the interest rates that are already going up.
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  So you can see, it makes absolute sense as to how
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  and why Mortgage rates are falling. So here's the thing,
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  desperation by the banks. You're starting to see what happens when they can see
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  the writing in the wall a little bit. Because when customers stop coming, you know, you don't fix
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  the price of the product, you change the product, okay? They've got to ebb and flow with what
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  the consumer demand is. And the consumer demand is like, well, I can't afford that,
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  so what can you give me? The RBA can't cut rates because of inflation.
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  But 18 lenders, have cut the variable rate.
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  So how banks make money is they'll borrow at the federal funds rate, or they'll borrow
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  at the reserve bank rate, or the overnight rate, which is the cash rate, and
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  they'll lend out at a higher rate, which is the retail rate. And they'll take the
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  net interest margin. And that's how you determine a bank's profitability is
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  the net interest margin. And Commonwealth banks have the highest net interest margin for a long time. But
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  the net interest margin compresses when they
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  drop the retail rate and take less margin. And
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  they have to do that to actually get people being able to borrow. So
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  that's what's happening. So the RBA can't cut rates. So
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  the banks have taken upon themselves to cut their own retail rates, which is compressing their
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  margin. I think AMP slashed their own fixed rates down by 50 basis
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  points, which is huge. I think there's 40 lenders now under 6%. They're trying to
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  get people under 6% to get in. Because once you go above that, on
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  a million dollar loan, that's a lot. It's a tremendous amount of interest, right?
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  If you're looking at a half a percent, you're looking at an extra five grand a year. It's not cheap. So
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  the RBA is going to hold and the banks are going to discount anyway
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  because they need to. It's a bit of a clearance sale. What can we get out there? Then
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  check this out. They announced, AMP announced a 40-year mortgage.
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  What's happened? 40 years. Because if you elongate the term of the mortgage, you
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  can drop the repayments. They've also implemented 10-year interest only
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  loans. So an extension of interest only beyond five years, you can do 10 years.
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  So they're starting to put bells and whistles on it. And of course, they've backed their
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  own 5% deposit schemes as well. So 5% deposits
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  with lender's mortgage insurance, but it enables people
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  to get into the market. So a little bit desperate, like, oh, can we drop the
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  deposit amount? Can we drop the retail rate? Can we extend interest only periods?
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  What can we do? And so that's challenging for a lot of people because at
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  5% deposit, you've got 20 to 1 leverage, which means if your property
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  falls by 10%, you're really going to lose 200% of your
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  equity capital. I think it's a little bit funny because people
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  don't understand this, but it's crazy. That's what's going to happen. That's
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  probably what's already happening. The discounts or these bells and whistles that the banks are
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  putting onto these products is aimed at new borrowers, right?
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  They've got, it's not just attracting new borrowers, but churn in the current customer
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  base at rates of say six to 7%. So
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  they're getting new customers in at six or under six, and they got old ones
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  at seven or six and up. So they're going to have some, so
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  they're going to refinance, a lot of those older customers are going to refinance. They're
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  going to lose, there's going to be a lot of churn. Now, how I think this is going
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  to play out is you're going to see this in the bank's earnings, which is why I
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  don't only hold any Australian banks. I used to hold a lot of CBA, but
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  I don't anymore because I'm like, oh my God, CBA is going to get clobbered. What's
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  interesting about CBA Bank is fascinating because every time it brings out its quarterly biannual
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  earnings, whatever it is, it's like, oh, Commonwealth Bank made over $10 billion
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  in profits. If you look back like 15 years, 10 billion, 15 years
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  ago, it hasn't grown its earnings materially, like it hasn't. And
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  how it's getting a 13% return on equity capital, it's a very overpriced bank.
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  And I think it will at some point correct.
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  And you can see why, because they're starting to get a little bit desperate as to how they attract
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  and hold customers. They're squeezing blood out of a stone because the
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  consumer in Australia is getting cooked by interest
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  rate rises at the RBA. It's getting cooked by inflation, lifestyle costs
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  and creep. And it's getting cooked by the fact that houses are just more expensive, which
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  means you've got to borrow more. So all these three things, and they're getting cooked by the uncertainty
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  and change in the tax legislation. So they're getting cooked, cooked, cooked. So
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  what are you supposed to do? You get blood. How much more blood can you get out of the consumer? They're
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  tapped. So that's what's happening. So here's a
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  few concerns with the things that are doing. The first thing is this. Trap 1, you're
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  going to get a 40-year loan term. It's crazy. So for
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  example, as $600,000 loan, 6.5% roughly over 30 years,
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  the total interest is $720,000. So you're paying more than what you borrowed in interest. Over
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  40, it's $1,000,000. So it's an extra almost $300,000. in
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  extra interest over that period. So yes, you can afford them. So
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  it drops the monthly repayment from say $3,700 down to $3,400. So
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  it's going to save you $300 a month so you can get in,
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  but over that extra 10 years, they're going to take $300,000 out of you. So
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  the pitch is, hey, you get to save $300 a month extra. But
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  the truth of the matter is you pay $300,000 extra, right?
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  Half of the original loan again. So they're not lowering
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  the cost of a house, they're raising it and they're calling
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  it affordability because they're preying is the word. They're
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  preying on the Australian public's love
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  affair and obsession with owning houses and they
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  are. That's the first trap is the elongated loan terms. The second trap
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  is interest only for 15 years. If you're not paying off any principal, the only
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  thing you can bank on is capital growth. Right? That's
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  the only thing, and if it's not capital, if you're getting capital non-growth, which can
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  happen, yeah, you could be holding onto that sucker for 10 to 15 years and you only just
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  go down. And if the rent doesn't cover the repayment, you're losing money for 10 to 15 years,
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  it's a possibility. So I think that's a challenge, that's gonna suck.
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  In a flat market, it even sucks. So you gotta hope, hopium,
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  that the market goes up, and that's not a good strategy. Because by all accounts, and
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  if you look at our previous episodes, I don't think that's gonna happen. It's not
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  gonna have robust 12% growth like it just did. And then of
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  course, trap three is a 5% deposit, which is what we've talked about before.
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  So here's an example of why that's bad. So let's say you got
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  $800,000 house, and you put 5% down, five eights of 40, so
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  $40,000 equity cash in, price 5%, right? Which
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  is the verified falls that are happening right now, and
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  your equity is wiped out. immediately. So you're like, let's say you put it
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  in the next six months for 5%, 12 months in Sydney
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  for 5%, whatever it is, then your equity is gone. You have no equity
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  capital. Now, what's interesting is if it falls further, and you owe
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  more than the house is worth, then you've got negative equity, which is happening, then you can't
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  refinance, then you can't even sell. Had a student of
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  ours in one of our programs, he said, Lloyd, before I found you and you
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  know, your principles and so forth, I bought a property investment, in
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  fact, I bought two, and one of them, it's costing me 15,000 a
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  year to hold the property. So he's losing 15,000 a year holding the
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  property. I said, how much is it worth? He told me, and then how much is, it's
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  the owner, he owes more than it's worth. And he's like, what do I do? I'm like, you don't have a
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  choice, man. You can sell, and you can probably borrow some
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  equity from the other property to make up the shortfall, but you're gonna lose. Like, you
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  could sell, but if you don't have anything or
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  any cash to add to, like, you'd have to add in 40 grand to
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  sell. And so he's like, what do I do? I'm like, man, you might just have to grit your
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  teeth and hold on for this to recover. You might be holding a long time. He's like, oh my
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  God. But this is what's happening. People are just rushing into
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  these things. You don't want that to be you, right? So yeah,
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  if you add in the LMI, which is Lenders Mortgage Insurance, which by the way,
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  doesn't insure you, it insures the bank loan. Then it's an extra 10, $20,000, whatever
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  it might be, usually around eight to 10, depending on the size of
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  the property and the loan. It's also a sunk cost,
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  right? Just quickly, if you're ready to take control of your finances but feel stuck
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  on where to start, I have a solution. My book, Money Buys
• 10:04
  Happiness, simplifies investing and wealth building with practical steps
• 10:08
  to help you achieve financial peace. Get your copy via
• 10:11
  the link in the show notes and let's get your money working for you. Now
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  back to the episode. The other trap is that Australians
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  already hold $2.6 trillion in
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  mortgage debt. That's amongst the highest indebted households on
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  earth. And every product above adds to that pile for longer
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  with less buffer while the banks then can raise their provisions for trouble, which
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  they'll do. But they're selling you like a bigger boat while
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  they're quietly kind of like buying themselves life jackets. That's
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  what's happening. They're steering this in the background. This is actually happening real time. So
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  I think we could see a tremendous shift in
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  the earnings of the banks, right? So who gets crushed? Firstly,
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  the stretched borrower, someone who's got a 40 year term, 5% deposit, interest
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  only. It's like the trifecta, bang, bang, bang. It's like a maximum lifetime
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  interest with minimum equity. Not a good wealth building approach.
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  One rate rise or a price dip from being trapped. That's
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  what you don't wanna, you wanna avoid that. then they'll loyal existing
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  customers. So if you're a customer of a bank paying 7%, then the
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  new ones coming in are paying 6 and you're getting cooked by a whole percentage point,
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  which is that you could get 5 to 10 grand over to two year
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  period, just pay more. So if you want to refinance, now would probably be
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  a good time. The saver, how do you get killed? If the banks
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  are dropping retail rates too, they're probably going to drop deposit rates effectively.
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  So your loyalty to them into putting money to them goes unrewarded effectively.
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  And inflation will eat some of that too. Now, it's not all bad. I think you can get 5% plus
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  in term deposits. But again, after interest and inflation is probably negative
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  return. So unless you've got a longer term plan for that cash, it's
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  also a bit tricky. Who doesn't get crushed? Anyone
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  who treats their bank like a supplier, not a relationship. So the
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  bank has a department dedicated to your loan, right? So you need to be your
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  own, swindle them, right? Swindle them.
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  Go shopping, be tough on your refinancing, and
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  of course, you can pay off debts and not be owned by the bank, that's even better. So
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  that's how you avoid them, by not being with them, not working with them. It's
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  a possibility, right? Banks are awful, I don't wanna work with them. Now, they're
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  a necessary evil, because without banks it'd be way worse, so it's in between.
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  So, what do you do with your money? How does this affect
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  the movement of money? Well, what you wanna do is you want to find
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  your actual rate, not the advertised one. And again, that's about just shopping
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  around to find a better rate. You can go to a broker and the
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  bank and play them off against each other, like a bit of a Dutch auction, and
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  then go with the one that's gonna help you refinance long-term into something
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  more effective. And then refuse the stretch products. If
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  you get tantalized by a 40-year term or interest only
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  or 5% that they're giving you, turn a blind eye, don't do it, right? Because
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  it's gonna pay, it's gonna come and bite you in the butt later. And
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  as rates fall, like it won't fall for another couple of
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  years, but as they do, keep the same rate. Keep it because you're going to be
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  paying off principal faster, right? And then if
• 13:01
  you have an offset account, of course, against your mortgage, use it. An offset account
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  is where you can have a regular everyday account that's offsetting the balance in there,
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  will offset that balance in the mortgage. And that's what's going to save you interest too.
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  And a lot of people don't even know what an offset account is. So ask your broker or
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  your bank about an offset account. We have offset accounts on our business
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  loan, which is really cool. So I run our working capital through those and I literally pay
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  no interest. It's great. So you can do those things as well. If
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  you're an investor, run every deal at a principal and interest scenario so
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  that you're at least getting ahead. You're not relying on capital growth. It's
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  worth the two-hour process to do that long-term
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  to save your interest because you don't want to be stuck paying an extra 300k.
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  So are the banks evil? No. They're incentive machines.
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  They're businesses. So if I was a bank investor, I'd be like, good,
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  I'm glad you're trying to make more money. So their
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  applications are falling. Of course, they're going to do something about it. Buyers too. They're
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  trying their best to appease the shareholders. Now, what's fascinating
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  about that, you'd be like, oh, those bloody shareholders. Guess what? In your superannuation fund
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  that you own, most of that's in banks. So
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  you are a shareholder of the banks. The hypocrisy, the
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  irony of that. You're like, oh, the bank's half of
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  your retirement funds, if not all of them, are literally geared to the
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  banks doing well. Don't beat them up too much, your superannuation will get killed. It's
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  weird. We live in a weird world. So just understand
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  their incentives. They're not there to, you know, they're there to make money. Okay.
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  Just set yourself up so you can make money from them as best you can and
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  stay the other way around. That's all, that's all it is. So I think what's gonna happen is you're gonna see bank
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  earnings start to get hurt a bit. You see bank stock prices fall,
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  I'd imagine. Are they gonna get crushed? They're gonna certainly provision for bad and
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  doubtful debts, cause that's coming. And I think they've
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  stretched these products as far as they can. I don't anticipate any
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  massive growth in the banking sector. And I wouldn't touch
• 14:48
  bank stocks personally, but they are in your super fund. That's okay though,
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  don't worry. You get a long-term time horizon, you're gonna be fine. So I hope that makes
• 14:55
  some sense as to what's going to happen with the banking industry. This episode is all about how you
• 14:58
  can navigate it and understand it better. So if you've enjoyed the episode, hit the
• 15:01
  subscribe button or leave a question or comment below about what you think about
• 15:04
  what's happening with what they're doing to save their earnings and
• 15:08
  squeeze every last morsel of interest out of consumers. I'd love to know. See you
• 15:11
  in the next episode. Thanks for listening to Money Grows on Trees. If you enjoyed the
• 15:15
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• 15:19
  subscribe to us on YouTube so you never miss an episode. And
• 15:22
  if you're serious about building wealth, make sure to check out the links in the show
• 15:25
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