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.
- Check out the various mortgage reduction websites.
- Find out how long they’ve been in business.
- What sort of on-going monitoring service they provide.
- All should provide an obligation free introduction to their services.
- 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.
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