Making Your Mortgage Pay You Dividends.

I hate to see so many of New Zealanders’ hard earned dollars going to join our off-shore debt mountain.

Like most of the Western world, New Zealand joined the “buy now pay later” mind set.

At the time, it seemed like the best thing to do. No one questioned the fact that all this borrowing was supported on the interest charged or that ownership of the so called assets was nominal and, in some cases, notional.

It’s easy to be wise after the fact but economic history has modeled the cycle of boom and bust since the 19^thcentury.

 As a result of the great depression of the thirties, our grandparents had a real appreciation of the value of being cash positive. Consequently they chose to simplify their household economy into a ledger book model where nothing was bought unless it could be afforded. Power bills, school uniforms and holidays were saved for penny by penny. It was all grittily accountable.

When I started teachers college, in the late 60s, some of my friends began to cautiously put clothes on lay-by. It seemed almost risqué.

Well, haven’t times changed? Advertizing has moved on from the fifties where radio jingles about toothpaste and the soap powder worked on people’s insecurities about cleanliness. Now it’s a full scale offensive on our need to possess the newest and best of commodities. This is a merciless up-selling process because new and technically superior models are programmed to supercede the latest models every six months or so.

Unfortunately, our wages are nowhere sufficient to keep up with this onslaught. In fact, a lot of us have gone on a borrowing spree. We borrow money to finance our house, our car, our holidays and recreational pursuits. It has become a way of life and has facilitated much in the way of instant rewards. However, let’s consider the value of these rewards. Buying a car is always an exercise in devaluation. Holidays create a ten day window of opportunity for relaxation but the only tangible thing left is the memory which is qualitative in value but cannot be traded in order to pay the bills. As for the house, currently our wages go nowhere near the cost of a house so we have to borrow up to $200k and beyond to finance the difference.

To be fair, even our balance obsessed ancestors did have to borrow on houses because, then as now, houses could not be saved for out of the household income.

New Zealander’s have historically held special store in owning their own home. Maybe it’s because we are an immigrant society and, having a stake in our new territory is what our ancestors came here for, leaving an old hierarchical world where land was owned by a privileged few.

Land is still a privilege. Not everyone can afford to invest in it. Those who do often take a literal approach to their investment. They spend twenty five years investing a fairly large proportion of their income in paying for their house. They are focused on purely owning the house. They see the house as an asset worth paying for and this is, of course, true. However, if they were to spend as much money on stocks or shares they would expect on-going returns. If they weren’t getting them, they would withdraw their money and invest elsewhere.

So if you were to treat your house as an investment rather than the property you rent from the bank how would your attitude change?  Wouldn’t you become a bit more demanding about getting a better return on your money?

So, let’s look at how you can get a better return on your money. Firstly, do some due diligence on mortgage management companies. A lot of people don’t know they exist.Yet, mortgage management is in a professional category all of its own. No one thinks twice about employing an accountant to get back unnecessary tax. Yet people persist in believing that the only way out of a mortgage is to pay more to the lender. This misconception blinds them to the fact that there is a much more cost effective way of dealing to a mortgage.

Mortgage management programmes tackle the problem of compounding.  And it’s the way interest compounds that causes many New Zealanders’ to pay two to three times the amount they borrowed and what forces them to take 25 years to pay off their debt. However if a person’s mortgage is properly calculated and managed through time, compounding can be utilized to the mortgage holder’s advantage. This allows them to get out of their mortgage much sooner and save many thousands of dollars in the process. For most people this sounds a bit counter intuitive as it’s difficult to believe it’s possible to pay less and get out of a mortgage sooner.

So how does it work? It’s based on people banking through an interest only portion of their mortgage and yes, this facility has a bad name because unmanaged it can get people into further debt.  Properly managed however, it has a truly amazing capacity for converting unnecessary interest into savings which allows people to pay down their mortgage much sooner, have a better balance between cash flow and expenditure and achieve current and future financial goals cost effectively.

 

 So, if you like the idea of making your mortgage more cost effective and have it drive some benefits for you along the way, it’s well worth your while to do some due diligence on mortgage management companies. However, getting these sorts of advantages out of your mortgage is no quick fix and it’s important to make sure that the mortgage management company you choose is prepared to work with you through time and your changing circumstances.  Proper planning and managing means the you counter sign a contract that obligates the company not only to get you an advantageous facility but to crunch the numbers through time, consult on a regular basis, and update and re-do plans as your circumstances  dictate. An ethical company is not going to plan for you unless you make significantly, cost effective savings.  

 

So check it out. Find out what you could be getting compared to what you are getting now. It must make you as mad as it makes me to know so many hard of our hard-earned Kiwi dollars are going off-shore to advantage overseas shareholders.  

                                                                                                                                                                  

Why are so many New Zealanders such poor savers?

We’re lead to believe we’re short term thinkers and just plain bad with money. But what if this isn’t what’s causing our savings problems? Perhaps being bad with money isn’t our national character trait? Perhaps New Zealanders aren’t any more work shy or spendthrift than any other Western nation? So if it isn’t any of  the above, there must be some fundamental reason why we’re not saving? So if it’s not entirely our own fault where should we look to find the cause?

Do we blame the Government? The banks?  Both are our traditional scapegoats for any perceived  financial failure. But maybe, just maybe, in this lack of savings instance, we have a case.

For example most of us realize we pay our home loan lenders 2-3 times the price of our house in interest but tend to think there’s not much we can do about it.

 Some people maintain that if you pay the lender more you will be out sooner. This is indeed true but such beliefs blind us to the fact that the reason our loans are so expensive and long term is that they are poorly structured and never managed in ways that significantly advantage the customer.

So, I would suggest that, if we New Zealanders have a national fault, it’s believing we can’t do anything to change these circumstances.

The first step is to properly understand the true cost of borrowing money. Not understanding this and not recognizing how much change occurs in the span of an ordinary life time often results in us signing contracts that end up preventing us from being able to save for our future security.  

Deana and Murray’s story exemplifies that by extending their borrowings without researching the consequences they unwittingly affected their ability to have a debt free retirement.

1983   Deana and Murray decide to buy a house together. The house Deana likes is a character bungalow in a suburb close to town. Its sale price is $28k

 Deana says, “It’s stupid to rent when we could be putting the money into buying our own home.”

Murray agrees. He is two years into his building apprenticeship and will soon be earning good money and Deana is a secretary who has been working since she was 17. She’s lived at home until meeting Murray and has already saved $17 k. Murray has saved 2k but has invested this in the reliable car he needed to drive between building sites.

“I can’t see a reason not to,” Murray says. “If you put down the deposit, I’ll take over the mortgage completely once I’m fully qualified.”

1987   Deana is now a full time mother. She has two children under five. Motherhood suits her. She has a circle of local friends and has developed her garden and is working on persuading Murray to become a vegetarian.

1990    Deana has decided that their three bedroom house won’t be big enough now she’s pregnant with her third. Murray is reluctant to move as he belongs to the local rugby club and doesn’t want to lose his mates but as Deana tells him: “Look Hon, the real estate agent brought us an offer of $52k which means this house has almost doubled in value in four years, so we’d be mad not to take our profit forward into another better house.”

A few weeks later Deana shows Murray a house in a beach suburb. “It’s on the market for $125K but if it’s anything like our current house it’ll be worth $250k in no time at all.”

 Murray is not so keen. “The last bloody mortgage took 25% of my income and this one’s going to be close on 45%. Cost of living isn’t getting any cheaper, either.”

                                                                                    

 “We can take a longer time to pay it off Muzz,” Deana replies.

                                    

 In the end they agreed to pay a $100k mortgage and add a further 35k for renovations and for Murray to update his car.

Murray is still uncomfortable. “Bloody hell, Dee,” he says, “ I’m 33 now and putting another 25 years on the mortgage means, I’ll be 58 before I’m done!”

 “Once our youngest is at school I’ll get a job,” Deana promises.

2000   Murray has joined an investment syndicate restoring cars. He’s borrowed more money against the house so he can finance his first vintage car and contribute his share to the cost of purchasing a workshop.

 Deana is working full-time now and seems to spend all her spare time coping with the delinquent habits of her teenagers. She’d been to court twice on his behalf her eldest son. At work her boss is paying her a lot of attention which she admits is welcome because Murray no longer takes much effort with his appearance and is always out with his mates.

2001   Murray finds out about Deana’s affair with her boss and they decide to separate. Murray is upset at first but a few months later he meets a woman who has a similar passion for vintage cars as himself.

2002   Towards the end of the year, when Murray and Deana finally divide up the estate, they have exactly $40k each. Murray isn’t too fussed, because his new partner owns her own house in another town and Murray moves to be with her on a permanent basis.

Meanwhile, Deana’s employee had ended what he called “their little affair.” Deana suspects the thought of her three teenage kids did not appeal.

Deana uses her $40k as a deposit on a three bedroom town house. Her income is $41k net per anum and to afford the $400k of principal and interest loan on her new home, she has needed to take her mortgage out to 30 years. Because her income is tight, Deana is forced to use her credit card, for unexpected expenses but believes that, once the kids have left home, she’ll be better off. She recently put her credit card debt into her mortgage but this has extended her mortgage by eighteen months.

“At this rate,” Deana exclaims, “I’ll be 72 before I’m debt free.” 

                                                                           

Throughout the life of their joint mortgage, Murray and Deana made what they considered to be rational decisions. Their assumptions about not renting and the power of capital gain were widely held  beliefs in the community and they acted on the popular wisdom of their time.

So what should Murray and Deana have known that might have prevented them ending up in their fifties with only $40k saving each after effectively both working full time for 20 years?

Would they have done differently if they had had better information around the true cost of debt?  

Would they have been prepared to do more research if they had been better educated about the dangers of on-going borrowing against a fixed income? 

But perhaps the most pertinent question is, who is ultimately responsible for what happened to Deana and Murray? It’s not only cost them, a secure retirement, it’s done unmeasurable harm to the national economy. That’s because it’s not only Deana and Murray who have been caught in an impoverishing debt spiral it’s all of us, isn’t it?

Line of Credit: Damned if You Do and Damned if You Don’t.

Line of credit can be a burden or a blessing. Commonly known as revolving credit, this facility is available as ANZ Flexi plus, ASB Orbit, BNZ Rapid Repay, NB Thoroughbred, and WPC Everyday flexible.

The principle of line of credit is excellent in that, if your income comes through a  line of credit portion of your home loan, it can off-set an interest charge and the money not charged as interest builds as your savings. Not only do you create savings out of the interest that doesn’t go to the lender but it compounds at lenders rate of interest and, unlike savings in a savings account, is tax free. So far so good!

The problem for most people is that theory isn’t easily translated into practice and according to most bankers 90% of those using line of credit fail to get an advantage and often allow the facility to flat line which, in effect, turns what could have become a principal and interest loan into an interest only loan. Not good and certainly not advisable.

Someone once said to me, he’d been advised to have a $20k revolving credit facility. He’d been told “it would see him right.” He then proceeded to use his line of credit facility to fund many purchases for his new house, maxed it out and was hit with having to repay it and the massive interest bill his spendings had incurred. The effect of this was he could no longer fully service his mortgage and needed to take a mortgage holiday.

This is not an uncommon story as is the fact that many people recently have been forced to live on credit cards or line of credit facilities in order to supplement their income because the cost of their debt  has compromised their lifestyle expenses

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In many respects  this is  living on borrowed time as the sums are never going to compute favourably. The golden rule being that it’s essential not to spend more than you earn. The example of the young man using line of credit to finance his lifestyle demonstrates how dangerous this facility can be if it’s not properly managed.

On the other hand, properly managed line of credit can finance life style needs and provide rainy day savings for those unexpected expenses plus reduce your borrowings so you can own your house much sooner than you could have imagined.

Most people get cynical when they hear this for the first time especially because getting out of their mortgage sooner by paying less interest sounds just too good to be true. However, people never doubt that accountants get back the maximum amount of tax for them so they don’t overpay the IRD.

Given that the business of the mortgage lenders is to make money out of the compound interest charged on borrowings, it shouldn’t surprise people to know that there are well established companies who have the expertise to make sure mortgage holders never pay unnecessary interest to their lenders.

It is not uncommon for a properly managed line of credit to return upwards of $100k to mortgages holders and considerably more if the mortgage is over $300k.

The great thing about properly managed line of credit is, it’s not about paying the lender more or going on a lifestyle diet but about consistently paying the lender less interest! This fact astounds all those who have accepted that their mortgage is long term and believe that the only way out of a mortgage is to pay the bank more.

Using a line of credit facility properly is not a quick fix however, as it depends on mathematical monitoring so the loan ratios are structured to be the most beneficial at all times. Secondly the monthly projections have to be updated and re-designed as people’s circumstances change and, thirdly and most importantly, most people appreciate some financial mentoring so their success is encouraged and supported.

Financially successful people know things that others don’t and one of those things is never to  unwittingly pay unnecessary interest on your  home loan.   

So, if you are considering how a mortgage management company might advantage you, do due diligence.

1. Check out the various mortgage reduction websites.
2. Find out how long they’ve been in business.
3. What sort of on-going monitoring service they provide.
4. All should provide an obligation free introduction to their services.
5. Then, make time to have an obligation free presentation so you can make an informed choice about whether  a mortgage management programme will be able to provide truly cost effective benefits for you and your family.