Use Your Mortgage Muscle
Sun Herald
Sunday August 11, 2002
Business editor David Potts looks at smart ways to turn your home equity into gold (or anything else you want).
IT USED to be said that greed is good. Now debt is good. And the funny thing is that because we're so appalled by the excesses of the 1980s and, yes, maybe even theexcesses of last week we're reluctant to use the right sort of debt for the right things.
The power of the ordinary garden variety mortgage is amazingly under-rated. Mark Bouris, executive chairman of home lender Wizard, has even written a book, Wealth Wizard (published by Hardie Grant Books; rrp $24.95 with royalties donated to the Vincentian Village), urging borrowers to do more with their mortgages.
``The more you borrow, the greater your potential wealth becomes," Bouris writes.
Well, he would say that.
And, yes, I know that household debt has reached 115 per cent of incomes, meaning the average family owes more than it earns. Surely this can't be a good thing it just feels wrong.
In fact, that figure doesn't take into account your assets. The truth is that the biggest debt by far is the mortgage, and on average it represents only 25pc of the value of your home.
That's because most borrowers kept up their old level of repayments even while interest rates were dropping last year. After the two rate rises this year they're still paying more than they need to. Take a bow, middle Australia.
At the same time, as anybody who lives in Sydney would know, property prices were soaring.
In fact, the potential power of mortgages, or rather the huge amount of untapped equity most home owners have, is even bigger because the 25pc is based on the original valuation.
Even new home buyers would have far more equity today than when they took out their loan thanks to low interest rates and the property boom. And that's after just one year.
This untapped equity is one of the most powerful financial tools available.
``Mortgages used to be iron-clad loans that tended to feel like cruel and unusual punishment," Bouris writes. Now ``the entire household finance system can be geared toward the residential mortgage and the amount of equity you have in it".
Strange as it seems, your mortgage can keep your expenses down, as well as give you the opportunity to invest.
The equity in your home can be used as a second mortgage, a deposit bond or additional line of credit to buy an investment property. It can also be used to invest in shares, managed funds or whatever you like. The lender doesn't care what you do because your home is the collateral.
But make sure you have the right mortgage first.
You need to decide whether you want an el cheapo no frills loan or a bells and whistles they're still called standard variable loan.
Even el cheapo loans generally have a redraw facility that means you can take back extra repayments you make. If your loan doesn't, move on.
If the loan is big enough, and the repayments fast enough, the redraw facility can by itself give you borrowing power, certainly enough to invest in shares or a managed fund and perhaps even another property.
Find a lender that doesn't charge a fee for having a redraw facility, or one for using it.
Standard variable loans also offer an offset facility, but this is a bit of a con. An offset is a savings account that, instead of paying you interest, just takes it off the loan. Did you notice that's exactly what an extra repayment does?
But the banks can be sneaky with offset accounts: they don't always pay the same rate of interest or, to be more precise, deduct the same rate of interest, as that on the mortgage itself. One lender, for example, gives you a credit of only 2pc when the mortgage rate is about 6.5pc.
Unlike redraws, offsets can have cheque accounts and what-nots attached to them as well, but remember the banks will charge you a fee for these.
HSBC is about to offer a no-fees, cheque book line of credit, according to mortgage broker Tony Harris of Money Store.
More popular is a line of credit attached to your mortgage. But again make sure the interest rate is the same as your mortgage. The whole point of marshalling the equity in your home is to borrow at the lowest price possible and that's at a mortgage rate.
In truth the line of credit is no more than a multiple redraw account anyway. But it may let you borrow more since redraws are limited to your overpayments.
By the way, the banks have become much more competitive with their mortgage offerings, even after allowing for monthly fees which non-banks such as Aussie Home Loans don't charge.
As a general rule, if you're a member of a white collar professional organisation (such as doctors, lawyers, accountants and so on) or earn more than $80,000 a year, the banks will take off 0.5pc from their official rate. But you have to ask. They may also agree to waive some fees, perhaps on a credit card if not on the mortgage itself.
Even if you don't want to invest in a wobbly sharemarket or a property boom the Reserve Bank wants to kneecap, there are still ways to get that mortgage working for you.
Using a redraw or line of credit to pay off your credit and store cards will do wonders for your finances. Just making the minimum monthly repayments on a credit card debt of, say, $5,000 would take more than 20 years to pay off. That's because interest is compounding at a higher rate anywhere from 12pc to 22pc than you're paying the balance off.
It's true that if you shunt all your credit card debts on to your mortgage you run the risk of it just adding to your loan and it's still there in 25 years.
It's easy to do if you forget about it. So make sure you keep paying at least the minimum monthly repayment that you were before. This time it'll make an impact on the balance, too.
While you're at it, you should be getting all your salary credited into your mortgage account. That will keep the daily interest charge down and you can just redraw to pay bills and expenses.
And did I say it'll also save you some tax on the interest?
If you're borrowing against your home equity to buy an investment, use the rent or dividends to pay off the loan. Then you're reducing the interest bill, which admittedly is tax deductible on the mortgage's investment component, as well as building up your equity again.
And don't get hung up on the fact that you're putting your house at risk. For example, you can buy shares with a slightly dearer margin loan without tapping into your home's equity.
But as financial advisers Noel Whittaker and Paul Resnik point out in their book, Borrowing To Invest (Simon & Schuster; rrp $24.95), ``it is possible to lose your house if you get into financial strife even if you are not using it as security for a gearing package".
You also need to consider whether to fix your rate.
Although the Reserve Bank didn't increase rates at last week's board meeting, thanks to the uncertainty about the US economy and perhaps the looming impact of the drought, we aren't out of the woods yet.
On the contrary, when the US recovery occurs the Reserve will be tripping over itself to lift interest rates.
But that doesn't mean you should fix. For one thing, and there's a touch of irony here, fixed rates on offer have been falling, not rising. So if nothing else, the longer you wait to fix, the better deal you're likely to get.
In his book, Bouris has revealed a trade secret about fixed rates you might think you're beating your lender, but it's the other way around.
``During all my time in the finance business, I don't think I've ever seen a genuine case of a customer beating the lending market when it comes to fixed versus variable."
Fixing's other drawback is that you lose all flexibility, including things such as redraws and lines of credit. That's why the experts say that if you want to fix so you know what your repayments will be in the immediate future, leave some of the loan on a variable rate.
Unit glut gives renters upper hand
THE only thing better than making your mortgage work for you is not having one at all. Because if you're renting, the world will be your oyster for the next few years. Or at least most of Sydney.
There will be a glut of units that can't find tenants in the next six months, according to property developer and Wizard chairman Mark Bouris.
And investors who bought units off the plan 12 to 18 months ago have probably already gone backwards.
``I think there is a tremendous supply of apartments untenanted still to hit the system," Bouris told a conference organised by the Australian Business Economists.
``Who will rent them?"
And John Howard might have a new breed of battlers to look after investors who distrust the super system and so bought a unit to see them through retirement.
That's because the erstwhile battlers first home buyers have bought homes and no longer need to rent.
Worse, some of the new landlords may have used the first home owners' grant. Yes, I know it's illegal. So is not paying tax and stealing from shareholders. It happens.
``I shudder to think how many of those borrowers actually rely on therental from their property to service the debt even though legally they should be owner-occupied," Bouris said.
In fact, Bouris estimates the demand for rental properties has shrunk 40 per cent as renters have become owners.
``There is a proliferation of choice and deals available to renters so they are moving into better accommodation as they can still afford to pay the same rent but are now being chased by more owners," he said.
Landlords won't be helped by the number of off-the-plan units, where foreign ownership rules are less stringent, sold to overseas investors. They will have to be let, too.
Worst hit will be city apartments.
Bouris said mortgage insurers ``currently have under watch certain CBD areas
in capital cities as well as corridors they consider have been oversupplied in
the past 12 months".
Best deals
LENDER RATE %
Cheapest basic Wizard 5.39
Cheapest standard RESI 5.75
Cheapest home equity Locumsgroup 6.09
Cheapest honeymoon Yes Home Loans 5.34
Cheapest 2 years RESI 6.20
Cheapest 3 years RESI 6.41
Cheapest 5 years RESI 6.71
Source: Cannex
© 2002 Sun Herald
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