We need the Government to act in our best interests
Consumers should take advice before making changes to help their finances, explains James Fitzsimons
Facing another year of financial woe, we need options to cope with our financial commitments and to protect our wealth. The good news is that there are things we can do to protect our position and it may only require a little financial advice to make the right decisions.
Not everyone has been adversely affected by the global downturn. Many people in the private and public sectors are better off now than they were before the crisis struck. But there are also those who have lost everything and those who can expect to follow that path in the coming year.
What we should have learned, in the past 18 months, is that we cannot afford to be spectators. As individuals we must take some responsibility for the position we are in. More importantly we need to be proactive in finding our own solutions.
Servicing debt, and housing loans in particular, is what concerns most people. If we find ourselves unable to meet our financial commitments, the first step must be to contact the lender, explain our problem and make alternative arrangements or, at least, ascertain what options we have. On the positive side, it has been indicated that legal action will not be taken in cases that have come forward to work with the lenders to find a solution.
Unfortunately the banks have not yet come up with acceptable long-term solutions. Nevertheless I recommend that borrowers who find themselves in trouble should take steps to find alternatives.
The main problem with this approach is that the system is based on a model that doesn't work and the banks have been slow to change. They are in more trouble than we are, but they are bigger and more intimidating.
Consumers need to act as a group, and they may need a little help to stand up to the financial institutions. The Government too has failed to address the problem. It has been so wrapped up with its own financial problems it continues to neglect the consumer. Its reliance on borrowing up to €500m a week to fund public expenditure last year has only compounded the problem for the taxpayer.
Loan repayments are dependent on renewed economic growth. In spite of claims to the contrary, there are no indications that we have turned the corner to recovery.
The Government should spend more time getting international lenders to be more flexible in accommodating our banking needs during the recession. We have a young Government that has made many mistakes. While it has learned some lessons, progress is slow and this cannot be accepted. Last year's floods and the harsh winter have made us complacent. We need to refocus and accelerate change in banking.
Nama is part of our solution, at least for the moment but there are serious questions over the changes in and the composition of the board. It is not enough and we need urgent and radical change in the banks. Until those in Government make the right decisions it will achieve nothing.
The Government must urgently force the banks to change their policy towards lending. We, as consumers, might expect the financial institutions to bear some of the burden for bad loans in the past. However, we must accept other approaches too.
One of the greatest constraints on consumers is the commitment to meet regular loan repayments. Credit ratings are downgraded when these commitments are not met. That principle applies both in our domestic banks and with the international financiers.
The Government should spend more time seeking meaningful change. Instead, it has rolled over and conceded to the demands of those who created our problems. If this approach continues, we will pay dearly for it in the future. The Government (taxpayer) guarantee to banks provides security that was not there before 2008. The providers of international finance must place more value on this new security.
It is time that our Government started to work in the best interest of its citizens. It has much more punch than it realises. It needs to use it. We will recover quicker and all will benefit.
Meanwhile, consumers, both business and personal, may need to review their own situation and what they can do. For many people it is not a question of rescheduling loans within existing banking policy. Those policies must be changed.
Many overdrafts became non-compliant in the recession by not being kept in credit for the required 30 days each year. Under those circumstances the facility can be withdrawn.
Alternatively, it might be converted to a term loan with monthly repayments. The banks have been flexible in this area but not enough as they are still operating based on old policy. This needs to be flexible during the recession with government support.
Mortgages are not being serviced due to falling incomes and redundancies. In many cases, there is negative equity. Hopefully this will change in the future. Meanwhile, there may be foreclosures for sound financial reasons.
However, where the borrower can service the debt with some flexibility, every effort should be made to accommodate them. This will require radically changed banking policy.
There will be cases where the provision of such loans was highly suspect and the banks might be forced to take a write off. Unlike the consumer they are the experts and carry a higher burden of care.
Those on fixed mortgages may be paying dearly in higher interest charges. Fixed mortgages always carry early redemption penalties. This is because the financial institution may have incurred costs in order to keep the interest rate fixed. Early redemption or switching of these mortgages should only be done after taking advice. The consumer is rarely aware of the real penalties involved.
A variable rate borrower may be offered attractive fixed interest rates to switch their loans. This should be considered carefully. There should be no penalties or charges when a variable rate loan is paid off early or switched.
However, if you move to a fixed rate loan, there will be charges for any unscheduled changes. The charges can be substantial. If a borrower wants flexibility in this area, the fixed rate loan may not be appropriate. This question will need to be addressed by many borrowers as interest rates begin to rise.
James Fitzsimons is a tax and financial adviser