David Koch believes there are signs we are headed for a credit squeeze. Picture: Hollie Adams
David Koch believes there are signs we are headed for a credit squeeze. Picture: Hollie Adams

Credit squeeze on the horizon

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 old fashioned 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 combinations of factors;

. regulators are clamping down on bank lending practises 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 of 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 into paying 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;

1) 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 worst-case scenario budget in case 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 10-20 per cent your financial institution will be watching closely.

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

David Koch says it’s time to protect your money. Illustration by John Tiedemann.
David Koch says it’s time to protect your money. Illustration by John Tiedemann.

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 it can be covered … or make adjustments to cope.

Maybe look at switching to a fixed rate fixed term loan if that is more advantageous.

If things look really bad, consider selling assets (shares, investment property etc) 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.

Checking your current credit rating will also be a handy piece of information to have.

2) 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 4 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 had previously no trouble getting loans, having their applications rejected.

David Koch says to protect your lines of credit and be nice to your banker. (Photo by Daniel Kalisz/Getty Images)
David Koch says to protect your lines of credit and be nice to your banker. (Photo by Daniel Kalisz/Getty Images)

3) 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 last 10 years. They are under instructions to go through each client and satisfy the bank's credit department of the financial soundness of their customers.

If you are expecting any unexpected financial glitches in the next couple of months forewarn the bank and provide a plan of how you intend to get back on track. The last think you want is to spook the bank.

This is particularly critical if you own a small business as well.

That means it's up to you to keep your bank manager informed on how the business is going. Keep them in the loop on the seasonality of your business. Inform them of new customers. Do whatever you can to make sure they have confidence in you, because their bosses are going to be quizzing them about you as a customer. You've got to have your bank manager on your side.

Look, this tightening of credit may not be as bad as some are predicting, but it's better to be prepared than caught short.



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