Thursday, February 21, 2008

Modern slavery - or: How the banks take us to the cleaners

The other day I asked myself how much money we have paid our bank in interest payments for our mortgage over the last ten years. It was an enlightening exercise. In fact, I was quite shocked. Once I added it all up, it was well over to $100,000.00 in interest payments and bank fees such as the insidious "fee for servicing your loan".

We always paid back a bit more than was required - we followed the usual advice of paying fortnightly rather than monthly (which adds a couple of payments per year and thus cuts down on the total amount of interest payable) and we also paid a couple of hundred dollars more than was required each month. In return, the bank showered us with letters depicting beautiful holiday spots in Hawaii and other lovely places, encouraging us to take a break by using some of our built up equity. To be fair, these letters stopped when the first inklings of the US credit crunch appeared on the horizon. Nevertheless, it was pretty obvious that the bank was not happy with our attempts to reduce our debt faster than the standard 25-30 year loan. No wonder!

According to the Commonwealth Bank home loan calculator, at current official standard interest rates of 8.97 per cent, an average home loan of $200,000.00 with a loan term of 30 years will generate over $375,000.00 in earnings from interest for the bank. Add to that $96.00 a year in monthly fees (a total of $2880.00) plus entry and exit fees of, say, $500.00 all up, and you might as well resign yourself to the fact that for several years, you will have to hand over your entire post-tax income to the bank. And there are plenty of people who have a mortgage that is much bigger than the "average" home loan. This is a form of modern slavery.

Of course, nobody forced you or me to become a modern slave. It's just that we all fell for the idea of being able to gain in the long run from ever increasing house prices, and that it is fine to stretch our debt over decades. Given the way house prices have gone in Australia, very few people can now afford buying a home without a mortgage. Most people tend to look at whether they can meet the next required minimum payment and maybe survive a couple of interest rate hikes when they first take out a home loan. We were no exception. We may then fiddle around the edges by paying fortnightly, feeling smug that we are cutting "years" off our loan, when in reality we continue to fatten the bank's pockets with our hard earned money.

I am no longer willing to play that game. I have put our family on the tightest budget possible to put every single penny we can spare into our mortgage. It is amazing where you can save when you put your mind to it! At last we can see some real progress in reducing our loan amount, even if the interest rate hikes of the last 12 months have slowed down our march towards freedom. And once the mortgage is gone, I do not want to ever go back into debt again.

1 comment:

  1. It's quite shocking isn't it? The amount of interest one pays over the life of a mortgage.

    We scrabbled and paid ours off in about twelve years, moving up to a larger house in the middle. It's the only time we have ever borrowed money for anything.

    Now I'm a shareholder in several banks.