Are Reserves Important?
One of the key considerations we like to take into account when a client speaks to us about a loan is "Reserves".
A real world example is my colleague Adam and his wife Kylie just got hit with a huge vet bill after two of their pets were sick. Fortunately they had funds set aside in their "emergency" fund so they never had to decide whether to operate based on their finances.
We can achieve this for clients in 1 of 2 ways: This can be either borrowed funds OR by retaining extra funds from a deposit.
1) A separate split housing the funds which is interest only - only to be touched if something bad happens - there is no cost to this until the monies are spent.
2) Take out a slightly larger loan than "needed" (eg 10K) the extra funds being left in either offset OR redraw.
With scenario 2, if the monies are never used you actually reduce the loan term through over-payments (which is what we aim for with owner occupied clients).
Its a tricky conversation to have with clients - much like the Insurance question.
However, I believe that part of our responsible lending process must be to ensure clients have some capacity to react to life's unknowns as they pop up.