Hi Guys
I hope this isn't doubled up anywhere.
An interesting article on Revolving Credit.
Revolving credit the loan star for homeowners
23 November 2003
But is it a genuine lifesaver or a quietly exploding timebomb, asks GARRY SHEERAN
Revolving credit has become the quiet revolutionary force within the mortgage industry, now impacting up to 40% of all home loans from a standing start less than a decade ago.
It is potentially more revolutionary in its effect on home owners than the low interest rates they now enjoy and even more significant than the rise of the mortgage broking industry or the proliferation of organisations (bank and non-bank) who will now lend money.
But like all revolutions, the growth of revolving credit facilities, credit-line mortgages, flexi-loans, blended mortgages - call them what you will - has its good and bad aspects.
For most people, paying off the mortgage is the biggest financial commitment of their life. The best way to save money on the mortgage is to pay it off quickly by throwing lump sums at it.
But for many working mums and dads, that is near impossible, unless they are left a handsome inheritance.
Revolving credit facilities of one kind or another have changed all that.
One distinguishing feature of these products is that home owners pay all their income directly into a mortgage facility account.
To maximise the effectiveness of the revolving facility, they then charge monthly expenses to the credit card which they pay off from their mortgage account before interest is charged.
Each day of the month income has been in the mortgage account, the outstanding principle on the home loan has been lower, so less interest (calculated daily) is paid.
In this way, sensible borrowers could take five to seven years off a 25-year mortgage, and save around $50,000, say brokers.
The other mark of revolving credit facilities in their various forms is the ability of borrowers to redraw money they have already paid off on their home loan, or access credit lines included in the facility.
This is where these new mortgage products can cost you far more than you are ever likely to save.
Mortgage Choice executive director Miranda Caird said ill-disciplined borrowers with a 20-year $100,000 mortgage and an additional $100,000 credit line could still end up owing $200,000 after 20 years.
"That is why we offer revolving credit facilities only to second and third time borrowers," she said.
Because revolving credit facilities can become time-bombs in the hands of unsuspecting and ill-disciplined borrowers, the mortgage industry has refined such products in recent years to allow borrowers to enjoy the upside, while limiting the potentially damaging effects of the downside.
Even so, Reserve Bank figures and banking industry estimates suggest between 60-70% of all mortgages are still "standard" lending products, mostly with fixed-term loans.
Regards
I hope this isn't doubled up anywhere.
An interesting article on Revolving Credit.
Revolving credit the loan star for homeowners
23 November 2003
But is it a genuine lifesaver or a quietly exploding timebomb, asks GARRY SHEERAN
Revolving credit has become the quiet revolutionary force within the mortgage industry, now impacting up to 40% of all home loans from a standing start less than a decade ago.
It is potentially more revolutionary in its effect on home owners than the low interest rates they now enjoy and even more significant than the rise of the mortgage broking industry or the proliferation of organisations (bank and non-bank) who will now lend money.
But like all revolutions, the growth of revolving credit facilities, credit-line mortgages, flexi-loans, blended mortgages - call them what you will - has its good and bad aspects.
For most people, paying off the mortgage is the biggest financial commitment of their life. The best way to save money on the mortgage is to pay it off quickly by throwing lump sums at it.
But for many working mums and dads, that is near impossible, unless they are left a handsome inheritance.
Revolving credit facilities of one kind or another have changed all that.
One distinguishing feature of these products is that home owners pay all their income directly into a mortgage facility account.
To maximise the effectiveness of the revolving facility, they then charge monthly expenses to the credit card which they pay off from their mortgage account before interest is charged.
Each day of the month income has been in the mortgage account, the outstanding principle on the home loan has been lower, so less interest (calculated daily) is paid.
In this way, sensible borrowers could take five to seven years off a 25-year mortgage, and save around $50,000, say brokers.
The other mark of revolving credit facilities in their various forms is the ability of borrowers to redraw money they have already paid off on their home loan, or access credit lines included in the facility.
This is where these new mortgage products can cost you far more than you are ever likely to save.
Mortgage Choice executive director Miranda Caird said ill-disciplined borrowers with a 20-year $100,000 mortgage and an additional $100,000 credit line could still end up owing $200,000 after 20 years.
"That is why we offer revolving credit facilities only to second and third time borrowers," she said.
Because revolving credit facilities can become time-bombs in the hands of unsuspecting and ill-disciplined borrowers, the mortgage industry has refined such products in recent years to allow borrowers to enjoy the upside, while limiting the potentially damaging effects of the downside.
Even so, Reserve Bank figures and banking industry estimates suggest between 60-70% of all mortgages are still "standard" lending products, mostly with fixed-term loans.
Regards
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