Advice Column: Your House Is Not YOUR ATM Machine

Judging by the number of posts that I have done on issues like secured loans, secondary mortgages, refinanced house loans, homeowner loans, etc.., you could be forgiven for mistaking that I wholeheartedly support them. But I do not. It really depends on who is borrowing, how much they are borrowing, what they are paying, why they need the money, …

Politics, Parents and Principal

For today’s post, though, I’d like to share an all too common problem in Taiwan that affects local homeowners, and this is a story that is true. One of my friends went back to visit her mother just last weekend because she had to vote in the Legislative Elections held in Taiwan nearly two weeks ago. On Sunday, I just happened to call her to talk about the rout that one of the political parties had experienced… Instead, I heard this rather disturbing story. (All numbers in NT$ – US$1:NT$32.5 est.).

heloc ads

The Principle Character and Her Principal

The mother (who is single, and has no independent income) was borrowing money as part of a secured loan on the family home. The house had been bought in the late 70’s in Taipei County, and had appreciated considerably over that time (by the order of 10x or more, I reckon).

But the mother had regularly dipped into the equity of the house for various reasons, including paying education fees, investing on the stock market, etc., so despite the value of the house increasing so much, and the initial mortgage being so little, the actual outstanding principal on the current loan agreements amounted to over $1,500,000 (I estimated it to be more than three times the original purchase price of the house).

Borrow and Spend Today: The End Is Nigh

Worse, just the day before the mother had tried to persuade her daughter and son to pay the installments on an additional $500,000 to fund living expenses for the mother (and unknown other expenses). This would have meant that the total amount of the expenses exceeded $2,000,000 and monthly payments would increase to approximately $20,000 per month.

Again, I don’t have access to the actual totals, the interest rates paid, or the terms of the loan(s), so I have no way to know if the amounts are correct or not. But typical mortgages in Taiwan are 20 years in length, and the APR is variable depending on the Central Bank of China’s lending rate. Obviously, secondary mortgages and ‘riskier’ mortgages may attract higher marginal rates than the standard rates (about 4% currently). Simple calculations using common numbers in Taiwan showed that they would need to pay an additional $3000 on the current installments – this is a conservative estimate. Given that they are already paying more than my own mortgage for their outstanding loan (and ours is $16,500 per month), it seems that they’d really be pushing the $20,000 mark.

Your House Is Not YOUR ATM Machine

There are a wealth of companies that in the late 1990’s and early 2000’s made a ton of money encouraging home owners to extract equity from their houses at variously reasonable to expensive rates to cover all manner of expenses:

  • refurbishing
  • new cars
  • foreign holidays
  • consumer items
  • investment
  • paying off credit card loans
  • and any number of other probable reasons

Of course, when house prices were rising by 10% or more annually, this was an easy way to get ‘free’ money. And with interest rates at historical lows, who cared? You simply borrowed the money, waited a few months or years, and sold. Then the additional loans were paid off.

To buy a new house, you could always borrow 100% loans anyway (or more), and with rising house prices, that 100% mortgage would soon be a large fraction of the total value of your house. In fact, you could add all sorts of costs, fees, decoration, equipment, etc. to the value of the house loan in the expectation that next year, your house price would have simply increased enough not to worry about it.

An example: 2001 with a 100% loan on a $200K house becomes in 2002 an estimated 89% loan as you pay off the principal and the house price rises; and so on. The maths works nicely.

The Math Doesn’t Work (Anymore)

The math for most consumers no longer works (if it ever did) when house prices stagnate, inflation jumps, oil prices increase, the economy slows, and jobs start folding. In fact, for many families, these pressures didn’t just come one at a time, but they came altogether. Then interest rates started jumping, too. Even in Taiwan, interest rates have already risen by 25% or more from historical lows. In America and the UK, interest rates are already over 5% on many mortgages. And that’s for standard mortgages.

mortgage rates

(all rates courtesy of

Helocs are being quoted at over 6.5% in the US with some rates nearing 8% on a secured home.

heloc rates

Given that most pundits are expecting interest rates in Asia to return to more historical norms (ie. 5% and above which, in Taiwan, was around 8-9 years ago), interest payments on that extra could add another 10% to the total if the rates continue to rise. Of course, property prices are rather buoyant right now anyway, and when the next batch of presidential elections are held in March 2008, things could move up even more.

While Taiwan is experiencing an upswing again in property, employment, exports, stock markets, currency rates, etc.. the same cannot be said to be true of the US markets. The pendulum starts swinging the opposite way. And all those house loans (that seemed a ‘sure thing’, just a few short years ago) are now turning sour.

For individuals and families, it is going to mean a period of difficulty: less spending power, job insecurity, house prices dropping, perhaps even a recession.

Are you ready for a bumpy ride?

If you’re not, you should start to make preparations: shore up your emergency funds, cut your spending for the short term, pay off the high interest debt as fast as possible, and budget more carefully in the longer term. Trust me on that one: my wife and I had to do this last year when our business went into something of a crunch. It wasn’t easy. But we survived. Things are better now. And they can be for you, too. But it’s a time for action.

And my friend, so far she refused to support her mother by taking on more debt for general life expenses; she has sought advice and suggestions on how to solve the problem permanently, though she faces some difficult decisions and discussions. But this is the kind of stuff that helps to determine what we’re made of.

What would you do if you were the mother? The daughter? Have you had experience of loan problems? Do share… You can always use a ‘nom de plume’, if you wish or email me privately. Polished, Pretty and (a little) imPersonal

The world of online lending gets more and more crowded every day as new entrants to the market increasingly raise the bar of what is expected from an online lending site. The latest review from InvestorBlogger is for a company called NetLoans whose tag line is “Homeowner loans lowest ever rates on our any purpose secured loans!” NetLoans provides access to a variety of secured loans for home purchases, debt consolidation loans, bridging finance, and so on.

netloans front

First Impressions: Polished, Bold and Web 2.0!

So, despite the slightly garbled tag line, the first impressions of the site are very pleasing indeed. The design of the website is clearly laid out: tabs along the top; interactive loan calculator right on the page, right hand sidebar, latest news headlines, and easy to find contact information.

It’s obvious from the first few clicks that a lot of thought has gone into the design and usability of the site from the users’ point of view so that users can find usable information from the moment they log on to the site. Unlike many similar sites, this quality would tend to make the site much ‘stickier’ than other sites in the same category.

The bold graphics, interactive forms, and fresh news feeds help to create the feel that this is a website designed for Web 2.0 though there are some obvious limitations in how far the model has been pushed. I did find it possible to get quite informative responses to some standard questions that I had.

The plus points on the site design are so many it’s difficult to know where to start: but I’ll highlight five that stand out to me as an outsider.

Loan Calculators: Interactive and Practical

It’s difficult to imagine why many loan websites do NOT include these calculators at least some where on the website. What is more surprising is the bold decision to put the loan calculator right on the front page. As if that weren’t bold enough, there are two tweaks that make it even better: there are three grades –good, fair, and poor– of credit scores that (while not particularly precise) can help potential customers evaluate the kinds of payments they might be making.

netloans credit ratings

Surprisingly, instead of just being requested to fill in details about your loan request, you can actually get some rule of thumb ideas about costs, options, and loan profiles BEFORE you commit to applying. In addition, you can (usually) get a choice of lenders as well by choosing different variables, credit rating, amount of loan, and loan period. The results automatically appear listed below. In fact, there are additional calculators in one of the other pages that can be used to calculate a debt consolidation loan. This interactive calculator is perhaps that appeals to me the most, because it can really help shape my thinking about the kind of loan that I would need, how much I can afford to borrow, and what terms are available. This alone is perhaps the best feature of the site.

Meeting Prospective Customers’ Leads: FAQs, Contacts, News, and an Affiliate Program.

Many such websites provide the barest minimum of help hoping that visitors to the website will simply pick up the phone and call the 0800 number or hit ‘apply’ or ’email me’, not realizing that many visitors are simply browsing for information at first to find out what loans and options there are, how much they cost, and which companies are better at serving their customers. NetLoans aims to reach such customers by providing regularly updated news feeds, helpful FAQs, useful calculators, recent news and a glossary of terms .

sample feed netloans

(This image of a sample feed shows some of the stories that have been recently published on the feed.)

Additionally, customer contact details are available all over the place, including contact phone numbers, email, a physical address with a map, about the only thing that is missing is a “Live Contact” box that allows potential customers to contact you from the website page (I’ve used it several times, and it’s very effective on some sites!).

Last, but not least for Webmasters, there is an affiliate program that is available. I’ve signed up for the program, and may end up using it on my own website here. The promised pay out is GBP250 per applicant (which is a lot of money with the current USD in the toilet situation!). This could be an attractive way for Financial Bloggers to adapt and extend the features of the website within their own e-finance website.

netloans affiliate

And the catch…

So, what is the catch? Well, and this is a highly personal opinion, that such very web 2.0 sites miss out on one very important aspect of the web in 2008 – that of creating community and interaction between real people.

While it is apparent that the website is intended to be a e-commerce website, the lack of a personal element – a voice, as it were – doesn’t help to brand the site as customer-friendly. It would be great if there could be a personal voice that highlighted how the loans REALLY benefit customers, especially if that were written in direct and honest manner. While the word ‘testimonials’ comes to mind, I’m thinking much more of examples and entries of how the loan officers made a difference in customers’ lives. This would be best served in a real blog style format where communication and community could be brought together. That combined with photographs, videos, and other tools of the modern ‘blog’ could really draw additional traffic to the website and generate the feel of a real blog.

Other Suggestions

I think it would be a good idea to include a TOS (Terms of Service) and a Spam Policy, both of which would help to increase customer confidence and assurance that the company is serious about its business. Also, it would be great if there was a functional search box, accessible from every page, so users could enter key words and find the information they are looking for, not just what the webmasters want them to know. These are minor suggestions, but would help cement what is otherwise an excellent website.

Disclaimer: While this review has been paid for by NetLoans, the viewpoints expressed here are entirely my own. If you would like a review of a website, please contact me for more information.