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Taking charge of the home loan

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  • Taking charge of the home loan

    Hi Guys

    Taking charge of the home loan
    30 May 2004

    Go, Orbit FastTrack, Rapid Repay and Choices are just some of the funky names given to revolving credit home loans.

    Should that be "revolting credit"? You might well ask.

    Among the home-loan types available, revolving credit certainly has a poor public image.

    Sharp practices a few years back led to a "wild west" gang of so-called mortgage-reduction companies offering unrealistic projections of how fast people could use revolving credit to get out of debt.

    Many people who should never have touched this form of credit found themselves living it up on easy borrowing while their mortgages went nowhere.

    But all that has changed, the experts say, and an increasingly money-savvy public is using revolving credit to get ahead.

    In essence, revolving credit is a floating-rate loan, dressed up to look like an overdraft-bearing current account, from which interest is deducted by the bank.

    The account is always in the red because it represents the amount you have borrowed. Borrowers have the flexibility to save as much or as little as they like.

    In its most traditional format, the account enables borrowers to borrow back everything they have paid in. That temptation is more than many people can handle, says Grant McFlinn of Mike Pero Mortgages, last year's New Zealand Mortgage Brokers Association Mortgage Broker of the Year.

    For those who get ahead in their repayments, that means credit without asking, with interest rates of perhaps 7-8%, compared with the 14-21% on credit cards, hire purchase deals, personal loans and car finance.

    McFlinn says: "If in people's own estimations they are unable to resist the temptation of discretionary purchases, they will almost certainly end up disappointed in themselves with revolving credit." But McFlinn says revolving credit can be a useful tool for those seeking to kill their mortgages in double-quick time.

    Mortgageworks' Brian Berry, chairman of the Mortgage Brokers' Association, says though consumers can still get revolving credit loans with no controls, the banks keep a fairly close watch on accounts and will suggest other forms of loan if things are not going well. And nowadays, many loans have a reducing credit limit.

    This is designed to reduce the capital owed to zero over the lifetime of the loan, giving the mortgagee certainty that, no matter how bad and mad they are with money, they will pay off their house. Such packages are offered by Westpac, BNZ, ANZ, Sovereign, many mortgage brokers and lender NZ Home Loans.

    More often than not, revolving credit home loans are now used sensibly as a small part of an overall mortgage package, the majority of which is made up of fixed-rate loans, says Berry.

    Andrew Whitechurch, of the BNZ, says the majority of its revolving credit loans are used by borrowers as the floating portion of their total home loan borrowings. On average, revolving credit makes up 20% of larger home loans, with the rest in fixed-rate loans.

    McFlinn says a borrower looking to make a portion of their loan revolving credit should follow simple rules. If they are fixing the rest of the loan for two years, the size of the revolving credit account should be equal to the amount they expect to be able to pay off in two years, excluding the amount they need to service their fixed loan. He also recommends adding a $5000 "buffer" to the revolving credit, giving flexibility to pay off more if an unexpected bonus comes along.

    Someone who thinks they can clear $20,000 of a $120,000 mortgage over two years might, therefore, have a $25,000 revolving credit loan and a $95,000 fixed rate loan. But anyone with less than $500 surplus at the end of the month, after all other expenses, might be better off in more traditional mortgages.

    Used with care, revolving credit brings benefits for the disciplined:

    * If a couple's income is paid into the account, and they use a credit card, their income reduces the capital on which the bank's interest is charged, saving them money.

    * The flexibility means borrowers can pay in as much or as little as they want. A bonus can go straight into reducing your debt. But if the homeowner needs to borrow a bit back to repair a roof, they can.

    * Having one account can be sensible. Invest $10,000 in another account at 5% and you get a return of around 2.5% after tax. Put into a revolving credit account, the sum saves more than twice that in interest rate payments.
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx