Keep A Mortgage Apace With Life
THE SUNDAY AGE
Saturday April 20, 1996
DREAM home or millstone? Owning a home can liberate you from the rent cycle of being at the mercy of a landlord or putting up with co-tenants. But it can also tie you up financially.
Even so, the variety and flexiblility of home loans now available has ensured a measure of freedom from those monthly repayments.
People who feel they are constantly running behind on the mortgage treadmill can now slow the pace to breathe easier, speed it up so they can get off more quickly or buy themselves better gear so the ride is more enjoyable.
There are several conventional ways of easing the burden of a mortgage.
Financial consultant Gavin Ross said mortgages should be paid off as quickly as possible.
``For every extra dollar that you pay off, you're effectively earning whatever the percentage of your interest rate is, on it.
You can't find an interest investment anywhere where you can earn that . . .
``My advice is to get the mortgage out of the way first - before savings plans for the kids or for private school education. Use the household budget to accelerate payments.
" Changing the frequency of repayments from monthly to fortnightly can also significantly reduce the term of a mortgage and save interest.
Borrowers worried about being locked into a mortgage can also choose to refinance their loan with another lender.
Refinancing has become so popular that it accounted for a record 24 per cent of total housing finance approved in February, according to Australian Bureau of Statistics figures released last week.
However, home-owners should weigh up the costs of swapping lending institutions mid-mortgage, Mr Ross said.
Institutions can impose a penalty for leaving them, perhaps a month of interest, and home-owners could be charged a loan application fee, valuation fee and mortgage stamp duty for the new mortgage.
``A lot of people are looking at refinancing their bank mortgage but you've got to look at the cost of doing it. You have to do your calculations. Obviously the longer it has to run, the more advantageous it is to swap."
Mr Ross also said it was generally not worth trading up a home. ``It's not worth upgrading unless you do it by 50 per cent or more or you're changing suburbs".
Peter Richards, of MoneyLink Financial Planning, said that if you are considering refinancing you should see how flexible your own bank can be - it may match the new loan you are seeking.
``If you don't ask, you don't get," Mr Richards said.
He agreed that changing institutions can have its drawbacks.
``If you are thinking of going from a plain home loan to another home loan, you'll have to look at the costs and whether it is worth the hassle."
A relatively new option for home-owners worried about being locked into a mortgage and being financially strapped for years are home equity or equity credit loans.
These loans allow the mortgagor to borrow against the equity they accrue - or already have - in their home, meaning that they can buy the things they perhaps went without in the early stages of their mortgage.
For example, someone who owns a $300,000 house and has whittled the mortagge down to $100,000 could have a $200,000 line of credit available to them, depending on the institution and their income. They still owe $100,000 on the house but can borrow another $100,000.
``Effectively, they have a cheque-book for $100,000 that they can use for anything," said Mr Richards.
Borrowers might choose to spend this available finance on a new car, a holiday or an investment property or portfolio.
``They can have two accounts within the one loan - a home loan where the interest is not tax-deductible and an investment account where the interest may be tax deductible."
However, new investments should be income-producing to make the exercise worthwhile financially, he said.
Home equity loans are particularly well-suited to small business people and those who have paid off large amounts of their mortgage.
``The loans are becoming popular - everyone's jumping on the bandwagon," Mr Richards said.
BNZ, BankWest, Citibank, Advance Bank and the Commonwealth Bank are some of the institutions offering home equity loans.
The trap is that spendthrift borrowers could be tempted to splurge and be in debt for years later.
© 1996 THE SUNDAY AGE