A Product Aimed At '13.5 Per Centers'
Sydney Morning Herald
Tuesday March 28, 1989
HOME buyers lucky enough to be still benefiting from the 13.5 per cent mortgage rate which applies on loans made before April 1986 are the main target of a new product launched last week by Citibank.
While the bank hopes its Citi2nd mortgage will appeal to other home buyers, it acknowledges that the group most likely to benefit are those anxious to hold on to their 13.5 per cent loans.
This is because borrowers in this position lose out financially if they refinance their homes when they renovate since the new loan will be made at the current 16 per cent rate.
Their only alternative is to get a second mortgage loan. While the rate on this varies from customer to customer, someone with an established home loan should be able to get second mortgage finance for around 19 to 20 per cent.
This, in fact, is less than the 21 per cent being charged by Citi2nd. Where Citibank has the edge is in the flexibility its second mortgage product offers.
In particular, borrowers can pay interest only or, alternatively, principal and interest. As well, they can repay part of the amount and then draw it down again, in this way using their Citi2nd loan as a tax-effective saving facility in the same way as special mortgage products (such as Citibank's Mortgage Power, Bank of New Zealand's Smarter Mortgage, the Australian Bank's EquityCredit and Chase AMP's Capitalizer).
Another attraction is the ability to get approval for a Citi2nd mortgage but only use what you want of it. However, Citibank retains the right to charge $20 a month if the used portion of your Citi2nd loan is less than 30 per cent of the amount approved. All this adds up to a great deal of flexibility, a point Citibank is pushing very hard.
However, potential users need to take note of the less attractive features before taking the plunge. These are:
* High fees - $500 in application charges and then Citibank's legal costs and valuation fees which, on a $70,000 Citi2nd mortgage on a $200,000 home, would be around $650. As well, there is stamp duty on the second mortgage.
* A relatively high interest rate which, while lower than that on credit cards and personal loans, is not particularly competitive in the area of second mortgages.
* The risk that getting this sort of line of credit will tempt you to overspend on consumption goods, in the process using up the valuable equity you have in your home.
Finally, for people with unregulated home loans, the best way to finance renovations is to approach your bank about getting top-up finance at the standard home loan rate.
If the bank won't agree, you could consider switching your business elsewhere, possibly to one of the special, tax-effective mortgages.
While Mortgage Power is currently charging a high 17.9 per cent, Smarter Mortgage and EquityCredit are both at 17 per cent, although the latter may soon rise to around 17.5 per cent.
Unfortunately, the rates on these products are more volatile than for standard mortgages. As a result, the flexibility they provide really is suitable only for more sophisticated users of credit.
© 1989 Sydney Morning Herald