The weird and the wonderful

Contributed By: Mike Phipps Finance on

Unless you are of my vintage (and what a good year it was !) you’ve likely never heard of Harry Day. He was from another time and to use a well worth cliche, I doubt that we will see his like again. Harry was born in Borneo in 1898 and spent his early youth there. He was educated in England and served in both world wars, first as a marine and later as a pilot. He was shot down during WW2, suffering burns to his face and hands but parachuted relatively safely into the hands of the Germans. I should mention that Harry was over 40 at the time and was only in active service
through his own insistence. In 1944 Day and 75 other prisoners organised what came to be known as The Great Escape. Sadly, they were betrayed and re-captured the next day. Most of the escapees were executed but Harry was spared, apparently due to his status on both sides of the conflict. He finally escaped in the closing days of the war after stealing a Volkswagen, no mean
feat if you’ve ever owned a VW of that era. For his service Day was awarded, among many accolades, an OBE and the United States Legion of Merit for his service to fellow POWs.

How do I know all this? Well, to be honest, until I started writing this I knew bugger all about Harry Day! However, unbeknown to me I’d been quoting him for years, for it was Harry who once remarked “rules are for the obeyance of fools, and the guidance of wise men”. While the quote is
now a bit dated and should perhaps refer to men, women and the undecided , there is a lot that Harry Day can teach us.

We certainly live in a rule driven society where there seems scant regard for the capacity of citizens to act with a degree of wisdom. The fiasco that is our “management” of the Covid crisis is but the latest in a litany of rules, mandates and legislation that simply don’t work. I suspect the same mob that told us the banking system was fundamentally corrupt (it isn’t) are now telling us that Covid will kill us all (it won’t). What we seem to do in the way we apply our rules is to remove from our processes any nuance or capacity for flexible critical decision making. The result is a society driven by a rule book so large and complicated that at best it’s an expensive and
time-consuming nightmare to follow and at worst… well, look no further than poor Novak.

Of course, once our “leaders” realise that the rules are impossible to follow they do something really interesting. They add more rules, without first getting rid of the ones that don’t work. Kerry Packer once famously challenged a senate enquiry to repeal legislation at the same pace that
new laws were introduced. The YouTube clip is magnificent and well worth a look. Watch out for the bemused faces of Kerry’s inquisitors, nothing’s changed.

In any event, this ramble needs to look like it’s going somewhere and indeed it is. I started by deciding to write about two very different sorts of finance. That’s when the rules rife struck me. Let’s start with the easy and more relevant one:
Strata / Owners Corporation Finance
As the name suggests this is debt funding to assist bodies corporate with expenses that might usually be covered via accumulated levies. The facility seems particularly appealing in instances where the sinking fund balance may be less than adequate, and the owners are not keen on paying a big ugly special levy. Terms of up to 10 years are generally available for residential schemes and up to 5 years for commercial. Funds can be taken in a lump sum or progressively drawn and can be used for multiple purposes. Levies are adjusted to take into account the loan repayments which essentially spreads the pain over the term of the loan. The arrangements require approval at general meeting and importantly, the facility is unsecured. That’s reflected in interest rates that are a bit higher than fully secured business finance.

Owners have no obligation to provide any personal or financial information and no personal guarantees or mortgages are required. Interest only options are available for up to 12 months albeit I suspect there would be little point in taking up such an option unless the improvements being funded were likely to materially increase income to the owners. If you are an owner who wants to know more feel free to give us a call. We work with strata managers to ensure the application is presented professionally. With a range of lenders providing
strata finance our finance tender process ensures the best possible result.

Yes, a bit out of left field but an increasing topic of conversation. I guess we are all getting older albeit I intend to fight it every inch of the way!
To say that what should be a pretty simple debt product is a minefield of rules and compliance would be an understatement! Put simply, a Reverse Mortgage is a way for an older person to access money against equity in their home without having to prove an ability to service the debt.
Nice for some you might say, but there are some rules (surprise) and it’s not all beer and skittles. Firstly, you’ve got to be over 60…ok, so far I’m in. You can use the funds for any worthwhile purpose including taking a lump sum to go on a holiday or regular drawdowns to supplement existing income from investments or the pension. There are no repayments as such, and interest accrues on a compounding basis. The older you are the more you can borrow as a percentage of your home’s value. As the loan and interest are repaid from the sale proceeds of the house, you can see that the closer you are to falling off the twig the lower risk to the lender, hence the
higher LVR.

Importantly, once you’ve drawn down on your limit and interest starts compounding you are essentially eroding the value of your property. That might be ok if property prices keep going up but there’s no guarantee of that. It is of some comfort that the law prohibits lenders from chasing
so called negative equity if the debt ends up exceeding the property value when the house is sold. The more concerning downside is the very real possibility that a borrower could live for a long time past 60 (that’s my plan) and end up with little cash from the eventual sale of the home to fund full time care or other later life arrangements. I think these are matters that anyone considering a Reverse Mortgage loan need to contemplate. Of course, if the kids are sweating on the proceeds of the estate, then gear to the heavens and have as much fun as you can get away with. There are of course rules around the kids coercing mum and dad to access equity to fund an early inheritance. That’s one rule I’m very much in favour of.
But seriously, there’s a lot to think about with this sort of finance and the impacts and outcomes may well be almost impossible to predict. Having said that if you Google ASIC Reverse Mortgage Calculator it’s worth a look. The managing director just caught me on the site and has suggested
reason for finance – New Ferrari is unlikely to get a run. I have argued that if you can’t erode your property value to acquire a beautiful car what’s the point in living… apparently I’m about to find out!

Interestingly, ASIC published a review of reverse mortgages in 2018 and with no hint of irony suggested that the rules, process and product were hard for older people to follow. They blamed, yes, you guessed it, lenders and brokers.

It’s also worth noting the existence of the Federal Government’s Home Equity Access Scheme, formerly known as the Pension Loans Scheme. It’s a product designed to provide additional fortnightly income and can’t be used for a lump sum draw down. It works pretty much the same as a Reverse Mortgage albeit with some tweaks to give some scope to accessing the payment without impacting your pension. Details are available on the MyGov site, good luck with that.

In closing I can’t help wondering what Harry Day would make of the Novak incident? I suspect his reaction would not be fit for publication. I’ll leave you with this from one of my favourite poets, Dylan Thomas 1914-1953. Apparently he drank himself to death after taking out a Reverse
Mortgage and hitting the town!

Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.
Do not go gentle into that good night

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