Newspaper article Coffs Coast Advocate (Coffs Harbour, Australia)

Make Your Loan Work for You, Not against You; Don't Fall into the Trap of Short-Term Gain for Long-Term Pain When Organising Finances

Newspaper article Coffs Coast Advocate (Coffs Harbour, Australia)

Make Your Loan Work for You, Not against You; Don't Fall into the Trap of Short-Term Gain for Long-Term Pain When Organising Finances

Article excerpt

BEST intentions; we all have them when it comes to home loans, but how easy we can come undone.

We're constantly told the benefits of off-set accounts, extra payments and generally getting ahead in loan repayments to become debt-free as early as possible.

However, according to Smartline Personal Mortgage Advisers, borrowers can sometimes sabotage these good intentions by taking out certain types of loans, structuring their loans in certain ways or solely focusing on interest rates.

Smartline's executive director Joe Sirianni says the group regularly sees mortgage holders fall into the following traps:

Not managing line-of-credit loans:

While they have their benefits if used correctly, a significant percentage of people who take out a line of credit end up getting into trouble.

aA line of credit is like a giant credit card, so they should be used only by people who can be disciplined,a Mr Sirianni said.

aTo get ahead with a line of credit, you need more money coming in than going out every month. And if you have access to credit, and you don't have discipline, you're more likely to spend more than is being paid off the loan and start going backwards financially.a

A line of credit usually attracts a higher interest rate than a standard home loan, of about 0.1-0.2%, and because you're not obliged to actually make loan repayments, the interest can be capitalised on your loan, creating bad financial habits.

Using consolidation to make short-term debt long-term:

Consolidating debt such as credit cards and personal or car loans into the home loan is a popular strategy to help ease ongoing cash-flow strain.

However, there are dangers with turning short-term debt into long-term debt.

aIf you roll this debt into your home loan at the beginning of your mortgage, you're potentially stretching out repayments over 30 years and this is going to cost you a lot more in the long run,a Mr Sirianni said.

For example, rolling a $30,000 debt into a 30-year home loan at 7% would require a repayment of $200 per month on the $30,000 debt, but would see you paying close to $42,000 in interest.

If you chose to pay it off over five years, the repayments would be $584 monthly and you would pay just over $5500 in interest.

If you are looking to consolidate, consider having a split loan, with the short-term debt in the second loan account.

Look to repay this loan as a priority with a higher level of repayments.

Focusing solely on the interest rate:

While an important factor, there's much more to consider in your home loan than just the interest rate, and a lower rate shouldn't necessarily be your only reason for refinancing.

Invariably there are costs involved in moving banks and the perceived interest savings can sometimes be lost in part by the cost of moving. …

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