Flexible Mortgages: Extra Cash On Tap

Sydney Morning Herald

Wednesday March 2, 1994

MICHAEL LAURENCE

ARE you planning to buy a home and raise money for an investment, renovations or maybe your business? And will you have equity in your new home of about 30 per cent or more? If the answer is yes to both these questions, you should consider a so-called flexible mortgage that provides a line of credit for any purpose from investing to funding a business.

Flexible mortgages also are commonly used solely for the line of credit by home owners who have paid off their conventional mortgage and intend to remain in their current house.

In short, flexible mortgages operate like an overdraft with the lender agreeing to provide credit up to an agreed amount.

You can draw down whatever sum is required within this limit and repay all or part at any time. Interest is payable only on the outstanding balance.

In most instances, the family home, investment property or holiday cottage is used as first-mortgage security for the loans. And you can borrow between 65 and 80 per cent of a property's value, with the actual percentage depending on each lender's policy. A greater sum usually can be borrowed if mortgage insurance is taken out.

One of the drawbacks with flexible or equity mortgages is their interest rate is generally one to two percentage points above conventional variable rate home loans. This means that most of these loans are unsuitable for those borrowers whose intention is simply to buy a family home.

However, there is one product that is way ahead of the opposition in terms of cost for borrowers wanting to keep the facility in place for more than a few years: GIO's Asset Accumulator.

For most borrowers, the Asset Accumulator has the lowest true or effective interest rate after the various costs - such as loan establishment and on-going fees - are taken into account.

In fact, about 35 per cent of Asset Accumulator loans are used for home purchases alone. Such a loan may be attractive to a borrower who does not want to be held to making repayments of some capital each month.

Mr Andrew Willink, the managing director of the independent interest rate research group Cannex, has examined the most popular flexible mortgages available to determine the cheapest true, as against advertised, interest rates.

The figures are calculated for a $100,000 loan kept in place for seven years. This survey assumes that the products' existing variable interest rates continue for the seven years.

GIO's true rate of 7.80 per cent places it almost three percentage points ahead of the most expensive flexible mortgage in our table.

The next cheapest flexible mortgages are Advance's One Loan (true rate, 8.89 per cent) and Metway's Asset Line (true rate, 9.25 per cent).

As with other variable rate loans, rates for flexible mortgages move up and down with general rates. The rate for GIO's Asset Accumulator, for instance, is set at 2.25 per cent above the average 90-day bank bill rate.

Lenders really have little interest in how you spend funds from your line of credit. And here lies the danger with these products.

Their concern is limited to the security for the loan and your ability to make interest payments from your salary and/or investment income.

Once you have ready access to much of the equity in your home - probably your greatest asset - there can be a temptation to spend unwisely on the likes of overseas holidays, expensive cars and poorly considered investments. Remember: you are putting your home on the line.

As mentioned earlier, there are various ways to use a flexible mortgage.

The most straightforward strategy is to use a debt-free home as security and devote the flexible mortgage's line of credit to investment. You may, say, want to buy a $150,000 home unit outright or maybe a share portfolio.

Or perhaps you wish to buy a new home for, say, $400,000 and are fortunate to have all but $100,000 of the purchase cost. Rather than borrow this amount through a conventional mortgage, you may decide instead to borrow $200,000 -half of which will be used for investment.

You may, alternatively, use a flexible mortgage secured against your current home to pay the deposit on a rental property. The rental property itself may then become security for another mortgage to provide the remaining finance needed for the investment.

With any investment, the interest and fees for your flexible mortgage are tax deductible.

And if there is a shortfall between tax deductible costs and the investment income - in other words, you are negatively geared - the loss can be claimed against your other taxable income.

Five of the flexible mortgages covered in the accompanying table offer a so-called split option. Under this arrangement, borrowers can choose to have two lines of credits: one for investment and the other for non-investments such as travel and home renovations.

The lenders issue separate statements for the two types of accounts.

Apart from helping borrowers to keep a check on their spending, the splitting facility makes a clear distinction between deductible and non-deductible expenses for tax purposes.

$100,000 FLEXIBLE LOANS: BORROWER'S GUIDE

Lender Product True rate* Advertised

over 7yrs initial

rate* *

% %

Advance One Loan 8.89 8.75

ANZ Home Equity Loan 9.62 9.50

Bank Melb Assetbuilder 10.03 9.95

Barclays Exec Mortgage 9.89 9.75

Citibank Mortgage Power 9.64 9.45

Challenge Equity Access 10.49 10.25

C'wealth Home Equity Fac 9.85 9.75

GIO Asset Accumulator 7.80 7.06

Metway Asset Line 9.25 8.95

Nat Australia FlexiPlus 10.14 9.75

St George Home Loan Plus 10.75 10.75

State Bk NSW Home Equity 9.68 9.50

Westpac Equity Access 9.85 9.75

* Calculated by including costs for a $100,000 loan in place for seven years

* * Rates are variable and move in line with general interest rate movements

Source: CANNEX

© 1994 Sydney Morning Herald

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