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Forcing people to repay welfare ‘loans’ traps them in a poverty cycle – where is the policy debate about that?

<p><em><a href="https://theconversation.com/profiles/hanna-wilberg-1466649">Hanna Wilberg</a>, <a href="https://theconversation.com/institutions/university-of-auckland-1305">University of Auckland</a></em></p> <p>The National Party’s <a href="https://www.1news.co.nz/2023/09/26/more-sanctions-for-unemployed-beneficiaries-under-national/">pledge to apply sanctions</a> to unemployed people receiving a welfare payment, if they are “persistently” failing to meet the criteria for receiving the benefit, has attracted plenty of comment and <a href="https://www.1news.co.nz/2023/09/26/nationals-benefit-sanctions-plan-cruel-dehumanising-greens/">criticism</a>.</p> <p>Less talked about has been the party’s promise to index benefits to inflation to keep pace with the cost of living. This might at least provide some relief to those struggling to make ends meet on welfare, though is not clear how much difference it would make to the current system of indexing benefits to wages.</p> <p>In any case, this alone it is unlikely to break the cycle of poverty many find themselves in.</p> <p>One of the major drivers of this is the way the welfare system pushes some of the most vulnerable people into debt with loans for things such as school uniforms, power bills and car repairs.</p> <p>The government provides one-off grants to cover benefit shortfalls. But most of these grants are essentially loans.</p> <p>People receiving benefits are required to repay the government through weekly deductions from their normal benefits – which leaves them with even less money to survive on each week.</p> <p>With <a href="https://www.stuff.co.nz/pou-tiaki/132980318/auckland-mother-serves-up-cereal-for-dinner-due-to-rising-food-costs">rising costs</a>, the situation is only getting worse for many of the 351,756 New Zealanders <a href="https://figure.nz/chart/TtiUrpceJruy058e-ITw010dHsM6bvA2a">accessing one of the main benefits</a>.</p> <h2>Our whittled down welfare state</h2> <p>Broadly, there are three levels of government benefits in our current system.</p> <p>The main benefits (such as jobseeker, sole parent and supported living payment) <a href="https://www.workandincome.govt.nz/products/benefit-rates/benefit-rates-april-2023.html">pay a fixed weekly amount</a>. The jobseeker benefit rate is set at NZ$337.74 and sole parents receive $472.79 a week.</p> <p>Those on benefits have access to a second level of benefits – weekly supplementary benefits such as an <a href="https://www.workandincome.govt.nz/products/a-z-benefits/accommodation-supplement.html">accommodation supplement</a> and other allowances or tax credits.</p> <p>The third level of support is one-off discretionary payments for specific essential needs.</p> <p>Those on benefits cannot realistically make ends meet without repeated use of these one-off payments, unless they use assistance from elsewhere – such as family, charity or borrowing from loan sharks.</p> <p>This problem has been building for decades.</p> <h2>Benefits have been too low for too long</h2> <p>In the 1970s, the <a href="https://mro.massey.ac.nz/handle/10179/12967">Royal Commission on Social Security</a> declared the system should provide “a standard of living consistent with human dignity and approaching that enjoyed by the majority”.</p> <p>But Ruth Richardson’s “<a href="https://www.stuff.co.nz/the-press/christchurch-life/124978983/1991-the-mother-of-all-budgets">mother of all budgets</a>” in 1991 slashed benefits. Rates never recovered and today’s <a href="https://www.1news.co.nz/2022/03/29/benefit-increases-will-still-leave-families-locked-in-poverty/">benefits are not enough to live on</a>.</p> <p>In 2018, the <a href="https://www.weag.govt.nz/">Welfare Expert Advisory Group</a> looked at how much money households need in two lifestyle scenarios: bare essentials and a minimum level of participation in the community, such as playing a sport and taking public transport.</p> <p>The main benefits plus supplementary allowances did not meet the cost of the bare essentials, let alone minimal participation.</p> <p>The Labour government has since <a href="https://www.beehive.govt.nz/release/government-delivers-income-increases-over-14-million-new-zealanders">increased benefit rates</a>, meaning they are now slightly above those recommended by the advisory group. But those recommendations were made in 2019 and don’t take into account the <a href="https://www.stats.govt.nz/news/annual-inflation-at-6-0-percent">sharp rise in inflation</a> since then.</p> <p>Advocacy group <a href="https://fairerfuture.org.nz/">Fairer Future</a> published an updated assessment in 2022 – nine out of 13 types of households still can’t meet their core costs with the current benefit rates.</p> <h2>How ‘advances’ create debt traps</h2> <p>When they don’t have money for an essential need, people on benefits can receive a “special needs grant”, which doesn’t have to be repaid. But in practice, Work and Income virtually never makes this type of grant for anything except food and some other specific items, such as some health travel costs or emergency dental treatment.</p> <p>For <a href="https://www.1news.co.nz/2023/02/27/very-stressful-beneficiary-says-he-cant-afford-msd-debt/">all other essential needs</a> – such as school uniforms, car repairs, replacing essential appliances, overdue rent, power bills and tenancy bonds – a one-off payment called an “advance” is used. Advances are loans and have to be paid back.</p> <p>There are several issues with these types of loans.</p> <p>First, people on benefits are racking up thousands of dollars worth of debts to cover their essential needs. It serves to trap them in financial difficulties for the foreseeable future.</p> <p>As long as they remain on benefits or low incomes, it’s difficult to repay these debts. And the <a href="https://www.legislation.govt.nz/act/public/2018/0032/latest/whole.html">Social Security Act 2018</a> doesn’t allow the Ministry of Social Development (MSD) to waive debts.</p> <h2>Contradictory policies</h2> <p>Another problem is that people on benefits have to start repaying their debt straight away, with weekly deductions coming out of their already limited benefit.</p> <p>Each new advance results in a further weekly deduction. Often these add up to $50 a week or more. MSD policy says repayments should not add up to more than $40 a week, but that is often ignored.</p> <p>This happens because the law stipulates that each individual debt should be repaid in no more than two years, unless there are exceptional circumstances. Paying this debt off in two years often requires total deductions to be much higher than $40.</p> <p>The third issue is that one-off payments can be refused regardless of the need. That is because there are two provisions pulling in opposite directions.</p> <p>On the one hand the law says a payment should be made if not making it would cause serious hardship. But on the other hand, the law also says payments should not be made if the person already has too much debt.</p> <p>People receiving benefits and their case managers face the choice between more debt and higher repayments, or failing to meet an essential need.</p> <h2>Ways to start easing the burden</h2> <p>So what is the fix? A great deal could be achieved by just changing the policies and practices followed by Work and Income.</p> <p>Case managers have the discretion to make non-recoverable grants for non-food essential needs. These could and should be used when someone has an essential need, particularly when they already have significant debt.</p> <p>Weekly deductions for debts could also be automatically made very low.</p> <p>When it comes to changing the law, the best solution would be to make weekly benefit rates adequate to live on.</p> <p>The government could also make these benefit debts similar to student loans, with no repayments required until the person is off the benefit and their income is above a certain threshold.</p> <p>However we do it, surely it must be time to do something to fix this poverty trap.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important;" src="https://counter.theconversation.com/content/212528/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /></p> <p><a href="https://theconversation.com/profiles/hanna-wilberg-1466649"><em>Hanna Wilberg</em></a><em>, Associate professor - Law, <a href="https://theconversation.com/institutions/university-of-auckland-1305">University of Auckland</a></em></p> <p><em>Image credits: Getty Images </em></p> <p><em>This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/forcing-people-to-repay-welfare-loans-traps-them-in-a-poverty-cycle-where-is-the-policy-debate-about-that-212528">original article</a>.</em></p>

Money & Banking

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What to do when your friend owes you a few

<p dir="ltr">We all want to do our bit to help our friends and family, and we’ve all heard that all too familiar “I’ll pay you back later”. But what do you do when later never seems to come around? </p> <p dir="ltr">According to a new report by finder, 1 in 4 Australians are waiting on a friend to pay them back. The numbers account for roughly 24% of the population, or 4.8 million people. Though the problem is by no means limited to the nation. </p> <p dir="ltr">The most common unpaid debts (all at 6%)  fall under the categories of gifts, bill splitting at a restaurant, and event tickets. Sharing ride services (Uber, taxis, etc.), travel expenses, and gambling activities are close behind - making up 5, 4, and 3% of the reasons for lax repayments respectively. </p> <p dir="ltr">"Our research reveals that millions of Aussies have borrowed money from their friends with no intention of paying them back,” Finder’s money expert Sarah Megginson said of their findings.</p> <p dir="ltr">"Not repaying money breaks trust and can put strain on the relationship, but it could also cause financial problems for the friend left shouldering the debt."</p> <p dir="ltr">There is, however, hope for those still clutching their receipts and waiting, with Megginson sharing some top tips to help people get back what they loaned out. </p> <p dir="ltr">"Your first port of call should be to ask your friend to repay the debt,” she said. “It can be a bit uncomfortable bringing up the topic of money but if you don't ask and then you're resentful, that can be more damaging to the friendship long-term.”</p> <p dir="ltr">She then explained how you may have to avoid paying for them in the future, and that re-setting boundaries with some of the people in your life would be of benefit to both parties, as well as having an honest conversation with them about it all. </p> <p dir="ltr">However, if the situation is more serious than a taxi ride or a friendly brunch, further action may be necessary, especially if a large amount of money is involved. </p> <p dir="ltr">"You can send a letter of demand, clearly outlining how much you are owed and asking that it be repaid within a certain time frame,” she suggested of the worst-case scenario, “otherwise legal action will be started.</p> <p dir="ltr">"If you receive no response you can lodge a claim with your state or territory's tribunal for resolving matters like this.”</p> <p dir="ltr">Megginson added that above else it is important to “exercise discretion” when loaning money, even to family and friends. Emergency funds, in particular, should not be touched by anyone but yourself, as every dollar counts in the midst of a cost of living crisis. </p> <p dir="ltr"><em>Images: Getty </em></p>

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“When you win, bring it back to Malibu”: Sean Penn loans Oscar to Ukraine

<p dir="ltr">Actor Sean Penn has shown his support for Ukraine in its war with Russia by loaning one of his two Oscars to Ukrainian President Volodymyr Zelenskyy, telling him it could stay on one condition: “When you win, bring it back to Malibu”.</p> <p dir="ltr">A video of the encounter between Zelenskyy and Penn, who is making a documentary about the Russian invasion, was shared by Zelenskyy’s office online and described the gift as “a symbol of faith in the victory of our country”.</p> <p dir="ltr">“It will be in Ukraine until the end of the war.”</p> <p dir="ltr">During his most recent visit to Ukraine, Penn told Zelenskyy that every time he leaves he feels “like a traitor”.</p> <p dir="ltr">“But if I know this is here with you then I will feel better and stronger for the fights,” he said before presenting the leader with his award.</p> <p><span id="docs-internal-guid-8089cf48-7fff-1c78-0b94-e0072bc02a66"></span></p> <p dir="ltr">“When you win, bring it back to Malibu. Because I feel much better knowing there is a piece of me here.”</p> <blockquote class="instagram-media" style="background: #FFF; border: 0; border-radius: 3px; box-shadow: 0 0 1px 0 rgba(0,0,0,0.5),0 1px 10px 0 rgba(0,0,0,0.15); margin: 1px; max-width: 540px; min-width: 326px; padding: 0; width: calc(100% - 2px);" data-instgrm-captioned="" data-instgrm-permalink="https://www.instagram.com/reel/CktdU1RLvIQ/?utm_source=ig_embed&amp;utm_campaign=loading" data-instgrm-version="14"> <div style="padding: 16px;"> <div style="display: flex; flex-direction: row; align-items: center;"> <div style="background-color: #f4f4f4; border-radius: 50%; flex-grow: 0; height: 40px; margin-right: 14px; width: 40px;"> </div> <div style="display: flex; flex-direction: column; flex-grow: 1; justify-content: center;"> <div style="background-color: #f4f4f4; border-radius: 4px; flex-grow: 0; height: 14px; margin-bottom: 6px; width: 100px;"> </div> <div style="background-color: #f4f4f4; border-radius: 4px; flex-grow: 0; height: 14px; width: 60px;"> </div> </div> </div> <div style="padding: 19% 0;"> </div> <div style="display: block; height: 50px; margin: 0 auto 12px; width: 50px;"> </div> <div style="padding-top: 8px;"> <div style="color: #3897f0; font-family: Arial,sans-serif; font-size: 14px; font-style: normal; font-weight: 550; line-height: 18px;">View this post on Instagram</div> </div> <div style="padding: 12.5% 0;"> </div> <div style="display: flex; flex-direction: row; margin-bottom: 14px; align-items: center;"> <div> <div style="background-color: #f4f4f4; border-radius: 50%; height: 12.5px; width: 12.5px; transform: translateX(0px) translateY(7px);"> </div> <div style="background-color: #f4f4f4; height: 12.5px; transform: rotate(-45deg) translateX(3px) translateY(1px); width: 12.5px; flex-grow: 0; margin-right: 14px; margin-left: 2px;"> </div> <div style="background-color: #f4f4f4; border-radius: 50%; height: 12.5px; width: 12.5px; transform: translateX(9px) translateY(-18px);"> </div> </div> <div style="margin-left: 8px;"> <div style="background-color: #f4f4f4; border-radius: 50%; flex-grow: 0; height: 20px; width: 20px;"> </div> <div style="width: 0; height: 0; border-top: 2px solid transparent; border-left: 6px solid #f4f4f4; border-bottom: 2px solid transparent; transform: translateX(16px) translateY(-4px) rotate(30deg);"> </div> </div> <div style="margin-left: auto;"> <div style="width: 0px; border-top: 8px solid #F4F4F4; border-right: 8px solid transparent; transform: translateY(16px);"> </div> <div style="background-color: #f4f4f4; flex-grow: 0; height: 12px; width: 16px; transform: translateY(-4px);"> </div> <div style="width: 0; height: 0; border-top: 8px solid #F4F4F4; border-left: 8px solid transparent; transform: translateY(-4px) translateX(8px);"> </div> </div> </div> <div style="display: flex; flex-direction: column; flex-grow: 1; justify-content: center; margin-bottom: 24px;"> <div style="background-color: #f4f4f4; border-radius: 4px; flex-grow: 0; height: 14px; margin-bottom: 6px; width: 224px;"> </div> <div style="background-color: #f4f4f4; border-radius: 4px; flex-grow: 0; height: 14px; width: 144px;"> </div> </div> <p style="color: #c9c8cd; font-family: Arial,sans-serif; font-size: 14px; line-height: 17px; margin-bottom: 0; margin-top: 8px; overflow: hidden; padding: 8px 0 7px; text-align: center; text-overflow: ellipsis; white-space: nowrap;"><a style="color: #c9c8cd; font-family: Arial,sans-serif; font-size: 14px; font-style: normal; font-weight: normal; line-height: 17px; text-decoration: none;" href="https://www.instagram.com/reel/CktdU1RLvIQ/?utm_source=ig_embed&amp;utm_campaign=loading" target="_blank" rel="noopener">A post shared by Володимир Зеленський (@zelenskiy_official)</a></p> </div> </blockquote> <p dir="ltr">After initially hesitating, Zelenskyy accepted the statue and quipped: “We have to win, quick.”</p> <p dir="ltr">Wednesday’s meeting, which marked Penn’s third visit to Ukraine since the invasion began, also saw the actor accept an award from Zelenskyy.</p> <p dir="ltr">The <em>Mystic River</em> star was presented with the Ukrainian Order of Merit of the third degree, which is given to citizens for outstanding achievements in economics, science, culture or military or political activity.</p> <p dir="ltr">“It was with great pleasure that I presented Sean Penn with the Order of Merit of the III degree,” the caption of the clip shared on Zelenskyy’s official Instagram read.</p> <p dir="ltr">“Thank you for such sincere support and significant contribution to the popularization (sic) of Ukraine in the world!”</p> <p dir="ltr">The video also showed the pair walking around Kyiv and arriving at Constitution Square where there is a “Walk of the Brave” - a walkway lined with plaques for world leaders who have supported Ukraine.</p> <p dir="ltr">Penn also has a plaque laid on the ground along the walkway, engraved with his name and the date February 24, 2022, which was the start of the invasion, as Penn was one of the first people to visit Ukraine after Russian troops moved in.</p> <p dir="ltr">Pointing to the plaque, Penn said there were three sources of pride for him in the world.</p> <p dir="ltr">“The place where my daughter was born, the place where my son was born and this. Thank you,” he said.</p> <p dir="ltr"><span id="docs-internal-guid-e58f0d92-7fff-56d3-d8c3-2674483699ac"></span></p> <p dir="ltr"><em>Image: Getty Images</em></p>

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I’m considering an interest-only home loan. What do I need to know?

<p>An <a href="https://moneysmart.gov.au/home-loans/interest-only-home-loans" target="_blank" rel="noopener">interest-only home loan</a>, as the name suggests, is where you only pay the interest on a loan and not the principal (the original amount you borrowed).</p> <p>While authorities such as the Reserve Bank often <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html" target="_blank" rel="noopener">see</a> them as risky, interest-only loans can be helpful in some circumstances.</p> <p>If you’re considering an interest-only loan, here’s what you need to know.</p> <p><strong>How long do they go for?</strong></p> <p>These loans are typically last for five years at most, before reverting back to principal and interest (where you have to pay back, through regular payments, both interest and the initial sum you borrowed).</p> <p>You could potentially apply for another interest-only loan after your first one winds up, perhaps by refinancing (where you take a new mortgage to repay an existing loan). But you might not get it – and you’d still have to pay off the principal eventually.</p> <figure class="align-center zoomable"><a href="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px" srcset="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=401&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=401&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=401&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=503&amp;fit=crop&amp;dpr=3 2262w" alt="" /></a><figcaption><em><span class="caption">Interest-only loans can cost you a lot more in interest over time than a regular principal and interest loan.</span> <span class="attribution"><span class="source">Photo by Andrew Mead on Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noopener">CC BY</a></span></em></figcaption></figure> <p><strong>What are the upsides of an interest-only loan?</strong></p> <p>An interest-only loan means you’ll have more cash available to cover other costs, or invest elsewhere.</p> <p>You can use a <a href="https://moneysmart.gov.au/home-loans/mortgage-calculator" target="_blank" rel="noopener">mortgage calculator</a> to work out how much extra cash you’d have if you switched from a principal and interest loan to an interest-only loan. It’s typically hundreds of dollars per week.</p> <p>This may get you a bit more wriggle room for daily expenses. Or, some people use the extra cash to invest in other things – such as shares – in the hope they can make more money overall and pick up some tax benefits along the way. That’s why interest-only loans are often popular among <a href="https://moneysmart.gov.au/home-loans/interest-only-home-loans" target="_blank" rel="noopener">investors</a>. Of course, this strategy comes with risk.</p> <p>An interest-only loan may also have a redraw facility, allowing you to add extra payments into the loan (above and beyond the interest) if you want, and withdraw money later when you need cash. This can allow people to avoid a personal loan, which usually has a much higher interest rate.</p> <p>Regular principal and interest loans may also have a redraw facility but the regular payments of principal are unavailable for redraw. That means less flexibility for the borrower.</p> <figure class="align-center zoomable"><em><a href="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px" srcset="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=408&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=408&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=408&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=512&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=512&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=512&amp;fit=crop&amp;dpr=3 2262w" alt="" /></a></em><figcaption><em><span class="caption">What’s right for one borrower won’t be for the next.</span> <span class="attribution"><span class="source">Image by Pfüderi from Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noopener">CC BY</a></span></em></figcaption></figure> <p><strong>What are the downsides?</strong></p> <p>The interest rates on interest-only loans are generally higher than principal and interest loans.</p> <p>For example, the RBA July 2022 <a href="https://www.rba.gov.au/statistics/tables/xls/f05hist.xls" target="_blank" rel="noopener">indicator rate</a> for owner-occupier interest-only rates is 6.31%.</p> <p>But the equivalent variable rate for principal and interest loans is 5.77% (the indicator rate is just a guide; the actual difference varies from bank to bank).</p> <p>Interest-only loans can cost you a lot more over time than a regular principal and interest loan.</p> <p>This means a borrower needs to manage their finances well to ensure they can cover the interest payments now and still have enough to pay down the principal eventually. So you’ll need a plan for how you’re going to do that when the interest-only loan ends.</p> <p>There is also a risk of a shock – such as job loss, personal crisis or housing crash – causing the borrower to default on the loan altogether.</p> <p>If the borrower defaults on an interest-only loan, they may lose the house and the bank is left with a debt that was not substantially repaid (because the borrower had not yet made a dent in the principal). It’s a lose-lose situation.</p> <p><strong>Are interest-only loans common?</strong></p> <p>Interest-only loans represent <a href="https://www.apra.gov.au/news-and-publications/apra-releases-quarterly-authorised-deposit-taking-institution-statistics-11" target="_blank" rel="noopener">11.3% of all home loans</a> in Australia.</p> <p>This figure has been <a href="https://www.rba.gov.au/publications/fsr/2017/apr/box-b.html" target="_blank" rel="noopener">trending down</a> over the past five years, due in part to tighter <a href="https://www.apra.gov.au/news-and-publications/apra-to-remove-interest-only-benchmark-for-residential-mortgage-lending" target="_blank" rel="noopener">lending restrictions</a> and the fact low interest rates have made principal and interest loans relatively cheap recently.</p> <figure class="align-center zoomable"><em><a href="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px" srcset="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=600&amp;h=399&amp;fit=crop&amp;dpr=1 600w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=600&amp;h=399&amp;fit=crop&amp;dpr=2 1200w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=600&amp;h=399&amp;fit=crop&amp;dpr=3 1800w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=501&amp;fit=crop&amp;dpr=1 754w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&amp;q=30&amp;auto=format&amp;w=754&amp;h=501&amp;fit=crop&amp;dpr=2 1508w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&amp;q=15&amp;auto=format&amp;w=754&amp;h=501&amp;fit=crop&amp;dpr=3 2262w" alt="" /></a></em><figcaption><em><span class="caption">Interest-only loans represent 11.3% of all home loans in Australia.</span> <span class="attribution"><span class="source">Image by sandid from Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noopener">CC BY</a></span></em></figcaption></figure> <p><strong>What does the research say?</strong></p> <p>One Dutch <a href="https://link.springer.com/article/10.1007/s11146-013-9453-9" target="_blank" rel="noopener">study</a> found “households that are more risk-averse and less literate are significantly less likely to choose an interest-only mortgage”. This partly due to lower initial repayments and wealthy households preferring the financial flexibility.</p> <p>Interest-only borrowing has also been found to <a href="https://www.sciencedirect.com/journal/journal-of-housing-economics" target="_blank" rel="noopener">fuel</a> <a href="https://doi.org/10.1016/j.regsciurbeco.2018.06.004" target="_blank" rel="noopener">housing</a> <a href="https://www.sciencedirect.com/science/article/pii/S1094202520300776?via%3Dihub" target="_blank" rel="noopener">speculation</a> and reduce housing affordability.</p> <p>A US study found borrowers also tend to <a href="https://doi.org/10.1093/rof/rfy016" target="_blank" rel="noopener">default</a> more.</p> <p>A Danish <a href="https://doi.org/10.1162/rest_a_01146" target="_blank" rel="noopener">study</a> found that once the interest-only lower repayment period is over and the loan reverts to principal and interest, those who didn’t make principal repayments suffered a large drop in disposable income.</p> <p><strong>Financial flexibility comes with a catch</strong></p> <p>With rates rising, interest-only loans may sound like an appealing way to have more cash available to cover other costs in life.</p> <p>But just remember financial flexibility comes with a catch. An interest-only loan could be more expensive in the long run.</p> <p>For some people, that cost will be worth it if it allows them to hold onto the house during a brief tough period or make more money investing elsewhere. But it’s a risk.</p> <p>And when the interest-only loan ends, you’re still stuck with the task of paying off the money you borrowed from the bank in the first place (with interest).<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important;" src="https://counter.theconversation.com/content/188817/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /></p> <p><em><a href="https://theconversation.com/profiles/adrian-lee-94688" target="_blank" rel="noopener">Adrian Lee</a>, Associate Professor in Property and Real Estate, <a href="https://theconversation.com/institutions/deakin-university-757" target="_blank" rel="noopener">Deakin University</a></em></p> <p><em>This article is republished from <a href="https://theconversation.com" target="_blank" rel="noopener">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/im-considering-an-interest-only-home-loan-what-do-i-need-to-know-188817" target="_blank" rel="noopener">original article</a>.</em></p> <p><em>Image: Getty Images</em></p>

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“Totally shocked” woman refused home loan due to maternity leave plans

<p dir="ltr">A New Zealand woman<span> </span><a rel="noopener" href="https://www.nzherald.co.nz/business/new-lending-rules-mum-shocked-by-90-day-maternity-leave-mortgage-condition/R3N4QF37MLMV44LUOPGV2VC6JA/" target="_blank">has been told</a><span> </span>by ANZ that she would only be considered for a mortgage if she returned to work within 90 days of giving birth.</p> <p dir="ltr">The woman is one of several people who spoke to the<span> </span><em>Otago Daily Times</em><span> </span>following the introduction of changes to New Zealand’s Credit Contracts and Consumer Finance Act (CCCFA).</p> <p dir="ltr">Changes to the act were intended to protect borrowers from loan sharks, but have prompted banks to vet mortgage applicants’ spending habits and personal finances more closely instead.</p> <p dir="ltr">The woman, who the publication agreed not to name, said she felt “totally shocked and completely discriminated against” by ANZ, after she was informed through her mortgage broker that the bank had changed its policy on maternity leave for borrowers.</p> <p dir="ltr">An ANZ spokeswoman acknowledged that the bank was enforcing stricter rules for customers taking more than 90 days of maternity leave as a result of changes to the CCCFA.</p> <p dir="ltr">She said there had been no change to the bank’s policy.</p> <p dir="ltr">However the woman, who was in the later stages of pregnancy when she and her partner attempted to refinance their home, found that her plans for maternity leave affected their chances of securing their loan.</p> <p dir="ltr">After a family member who had helped the couple finance their home to start with passed away, the couple were looking to get a mortgage through a bank with the help of a mortgage broker.</p> <p dir="ltr">The woman planned to take 12 months off of work from early December, including nine months of paid leave - three by her employer and six by the government’s paid parental leave scheme.</p> <p dir="ltr">She said she wanted to take a full year of leave after taking just seven months off following the birth of her last child, giving her more time to spend with the newborn.</p> <p dir="ltr">“It’s a really special time and I wanted to be there for it,” she said.</p> <p dir="ltr">When they applied for a mortgage through ANZ, they received a series of questions about their financial situation, as well as questions about her plans to return to work.</p> <p dir="ltr">Though she expected questions about their finances, “which I totally understood”, the woman said asking about her plans after her maternity leave was “deeply personal”.</p> <p dir="ltr">“The decisions I choose to make after that time should be mine and not dependent on the bank,” she said.</p> <p dir="ltr">On January 7, the mortgage broker forwarded an email from ANZ saying the bank had changed its maternity leave policy - now refusing to give mortgages to customers who took more than three months off work.</p> <p dir="ltr">The woman said she believed the couple could still afford the mortgage whether she was working or not.</p> <p dir="ltr">“I mean, we knew we could afford it - and if we didn’t, we wouldn’t have applied,” she said.</p> <p dir="ltr">Though she was confident she would return to work, she didn’t believe the bank had the right to tell new mothers when they go back.</p> <p dir="ltr">“It’s completely discriminatory and just not needed,” she said.</p> <p dir="ltr">The couple, who now have a three-week-old baby, are now looking to other banks for a loan.</p> <p dir="ltr"><em>Image: Getty Images</em></p>

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Tips for obtaining finance for over 50s

<p>If you are over 50 and want to borrow money for a mortgage or other major purchase, you might expect that lenders will want you to jump through more hoops than younger borrowers. While lenders will not discriminate based purely on age, it is true that there are certain qualification criteria that may naturally be increasingly more difficult to satisfy as you get older.</p> <p>So, what is it that lenders will be looking for and what can you do to improve your chances? Here are a few pointers that may help.</p> <p><strong class="bigger-text">The loan term is a critical factor</strong></p> <p>The most obvious factor that any lender must take into account is how long a potential borrower will remain working to earn an income. For borrowers over 50, a lender will naturally be asking themselves “how long will this person continue to be in the workforce?”</p> <p>If a borrower is aged 55, requires a loan term of 30 years, and is using employment income to service the loan repayments, then the simple math tells us that the borrower will need to work until age 85. In assessing such a loan request, a lender will need to consider the borrower's realistic working life.</p> <p>This may depend, among other things, on the type of work they do. For example, someone in a sedentary professional occupation, such as an accountant, may reasonably be expected to be able to work longer in life than someone doing manual labour.</p> <p><strong class="bigger-text">What if the term is too long?</strong></p> <p>If a lender considers that the loan term you require is unrealistic in relation to your projected working life, all is not necessarily lost. The lender may consider an alternative “exit strategy” for your loan, such as paying out the balance down the track using other assets that could be liquidated at that time. This could include items such as:</p> <ul> <li>Superannuation</li> <li>Savings</li> <li>Investment properties</li> <li>Shares</li> </ul> <p>By fully disclosing such assets, you will give the lender the opportunity to consider their value in assessing the loan application.<br /><br /><strong class="bigger-text">Improve your chances</strong></p> <p>Apart from loan term considerations, there are a variety of other issues that will impact your chance of a successful application.</p> <p>It’s always beneficial if you are able to contribute a substantial deposit toward the home or the item you are purchasing. Having significant equity in assets may also boost your chances.</p> <p>A healthy repayment record for servicing existing or previous loans is also a big tick for lenders. It may be worth accessing your credit report to make sure there are no inaccuracies on your record.</p> <p>Keeping your finances in shape by following a budget, demonstrating a regular savings pattern, and prioritising the repayment of high interest debts are all sound habits that will help build a picture for the lender that you are a responsible borrower.</p> <p>Your super assets and the retirement income that will generate is another important factor. That being said, be aware that lenders will also consider what will happen to your estate if you are to pass away. While your intentions may be to service a loan out of a private superannuation pension, some lenders will not want to get tangled up in estate negotiations if your assets are passed on via inheritance to other parties.</p> <p><em>* This information is provided as a general guide and is not to be reproduced or relied upon — all lenders will assess loan applications based on their own specific lending policy.</em></p> <p><em>Have you been able to secure finance after age 50? Tell us about your experience.</em></p> <p><em>Written by Tom Raeside. Republished with permission of <a href="https://www.wyza.com.au/articles/money/financial-planning/tips-for-obtaining-finance-for-over-50s.aspx">Wyza.com.au</a>.</em></p>

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Over 60

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