Father Sez

The four mistakes we have talked about so far are :- 

-         Not paying myself first

-         Not forming or joining a correct peer group

-         Not having a written budget and

-         Not managing my career properly  

There are more.

The next one is “not getting a better or the best deal on my mortgages”. 

My first mortgage was taken sometime in the late eighties. At that time, I was holding a key management position in a PLC.  The bank officers came to my office and took my particulars. A week or so later, they returned, this time with a solicitor. They had the documents all prepared and all I had to do was to sign on the dotted line.  

Which I did. 

The only things I remember about this mortgage :- 

a)    The Bank

b)    The amount borrowed

c)     The term and

d)    The monthly installment  

In the rush of the feeling of importance, I did not know then nor did I find out what the interest rate was, or whether it was a competitive one. And I did not even read the loan agreement and the other documents that came along with it.  

This loan was prepaid in full about 75% or so into its term. 

One would have thought that I should have learnt from this experience. Unfortunately I did not. 

With this house now free of loans, our family shifted to another town. We took another fresh mortgage on this first house and used the funds to pay for the second house in the new town + the renovations.  

As I was no longer holding that so called “important position”, this time, I had to join the queue and apply for the loan.        

Again the only things that I bothered about were same 4 things mentioned earlier. Now, having learnt a lot more about PF from the blogs, I have calculated the “losses” from this second misadventure. 

Had I shopped around for rates, I would have reasonably easily gotten a 10% reduction. If I had taken the lower interest rate loan and paid the same installments, I would have a year less to go. 

What I should have done

a)    I should have done comparison shopping for rates and terms of the loans. This should not have been too difficult an exercise as we do not have too many banks in our country. 

b)    I should have read every document carefully before signing. Though in this case, no surprises have come up so far, I have given the bank powers to raise rates at their discretion etc. (Though my loan is a fixed rate loan).

PS:

I tried to refinance the loan sometime last year, but the bank’s lawyers again came up with clauses allowing them to raise rates at their discretion, despite the ads promising an absolutely fixed rate loan throughout the length of the loan period.

My wife and I have since then decided to sell off the house and pay down our liabilities.

Don’t repeat my mistake, please

The purchase of our home is usually one of our biggest commitments. Hence the mortgage would be one of our biggest and longest liabilities. This liability has to be shopped for carefully, comparing rates and terms.  

If we are a good credit risk, we should make the Bank work for its money. 

Simple, being a loan guarantor! 

A guarantee ties the guarantor with all the obligations the borrower has in respect of the loan the borrower has taken, but none of the “benefits”. 

Or in other words, a guarantor is a borrower who never got the money. 

Banks in their well funded quest to make sure that no loan given out is left uncollected, very often insist on another party, (other than the borrower) to guarantee the loan. Hence if the borrower defaults, the guarantor pays. 

The main rule is “Never sign a guarantee”. 

The Malaysian Insolvency Department seems to agree. In fact, this is what they are openly announcing. 

Can we live with this rule?  

Banks, at least many in my country anyway, insist on a guarantor, even if the borrower meets all requirements. They just want to play safe. And the loan documents would say (in fine print, of course) that it is up to the Bank to choose who they want to go after, in the event of default. 

Organisations which give study loans, also insist on guarantors. In fact, they usually ask for two, and disqualify the parents. 

My wife has had a bad experience. A “friend” got her to sign a study loan guarantee, during my wife’s younger and much more ignorant days. (Now she’s young but not so ignorant.) The lender made a claim on my wife, claiming they could not find this dead beat borrower.  

The trouble my wife went through to track this bum of a “friend” down and get herself out of this jam has taught her a good lesson. 

But there are plenty of others out there, either nursing bad financial wounds or ending up as financial ICU cases themselves because of guarantees they had signed. 

Can we always say no? I don’t think so.  

We think, evaluate and weigh carefully many choices that we make in our lives. Just like that we have to weigh carefully the signing of guarantees. 

These are the rules we have set in our family. 

1^st – Follow the Main rule for all except family  

2^nd – For family, what is the purpose of the loan? 

3^rd – Has the borrower demonstrated, what we feel is adequate pf knowledge and discipline for us to believe that we will not be “called on” to pay the guarantee. 

4^th – What is the downside? Can we live with it should the worse case scenario play out? 

My history on guarantees so far are :- 

a) I gave an indemnity on a scholarship secured by my nephew, who did medical studies in a local university. He had to pay a certain sum, should he not serve the Government for a certain number of years after graduating. He is nearing the end of his “bond”.  

b) I signed as a guarantor for my cousin who took a housing loan. This was well before the setting up of all the above rules. I am happy to say that he has paid back the loan and bought another 3 units since then. 

Both the above turned out well.  

On the receiving side, two of my wife’s uncles have signed a guarantee for my second girl’s study loan. I strongly suspect that they did not evaluate this issue as carefully as I might have. Or perhaps they do have high regards for my family’s fiscal discipline.

I am indeed most grateful to them, as without meeting this condition, my daughter would not have obtained the loan.  

I don’t often receive requests to be a guarantor. If I do, I just smile and say that my employer has rules that prevent me from taking on financial obligations without their approval.  

This has so far worked for me. 

The CNNMoney story of 9^th September started like this.

“It seems surprising that Kurt and Vicki Oliver could lose their home to a bank foreclosure. They had great credit, long-term employment and excellent assets and income.”

This story is another one of the sad stories emanating from the subprime mess. However the Olivers do not appear to have been one of those borrowers who borrowed far more than they could ever afford, and took illogical risks.

As the CNNMoney opener states, the Olivers appear to be pretty stable and switched on people.  

Rather, these people seem to be one of those, who just did not read and understand the fine print of the agreements they were entering into. They entered into agreements, having no idea of the liabilities they were taking on. Now, sadly, they are paying the price. 

Sometimes, we see people at supermarkets, squeezing a loaf of bread, sniffing it and checking it from tip to toe, before buying it.  

Similarly, in fact, even more so, reading and understanding the documentation governing the financial obligation that we are taking on should be a must. But the financial dumps are littered with people who took this brokers word, that lawyer’s word, that lender’s word and regretted that day. 

A former boss of mine told me, “if anyone ever presents a deal to me, a deal that needed me make an immediate decision, my answer would always be NO. 

This makes a lot of sense. The same should apply for any documentation that we are asked to sign. We should ask for and get time to read and understand them, and if necessary get an independent trusted lawyer to vet them for us.

If we are asked to sign on the spot and no time is given for us to study the documents, we should just walk away. That’s it. Period. 

No financial institution or intermediary is there for purposes of charity. Their purpose, maybe, their sole purpose, is to make as much as they possibly can from us. Their lawyers (though, usually paid by us), use their full arsenal to protect the banks, and guess who, is left unprotected and exposed. 

I should know. 

I read an ad for a fixed rate loan that offered me substantial savings should I refinance my mortgage. I applied, went through the process and finally got a letter of offer.  

The legal documentation that followed was something else. The agreement provided for the lender to increase rates anytime they wanted, decrease the term anytime they wanted, transfer the loan to someone else at their wish and my cost…..blah, blah, blah. 

Had I just signed the documents, which was what the lawyer wanted, I would have gotten myself an open ended obligation that appeared to have no limits.  

Whilst it is important to manage our debts well, it is even more important that we take on only well understood and accepted debts in the first place.