It's Cheaper To Put It On The House

Sydney Morning Herald

Wednesday August 26, 1998

LEEANNE BLAND

WE all know competition is hot in the home loan market. The rates on some types of home loans are as low as 5.85 per cent. But while home lending rates have been heading south, seemingly at a rate of knots, interest rates on credit cards have been languishing at the top end of town, with rates for many products remaining at 15 per cent or more.

But now competition is heating up in the credit card market, too.

FAI has launched a Visa card that is part of its Link Line revolving line of credit home loan package, which offers an interest rate of 6.95 per cent. This move follows the recent launch of Citibank's Mortgage Minimiser credit card facility that is attached to its home loan product, Homecredit, which offers a rate of 7.25 per cent.

Cheaper credit cards are the catchcry. But there is a catch.

In both cases, the credit card has to be taken in conjunction with a home loan. And while the interest rate may sound highly attractive, unless the borrower plans to make a number of cash advances, it could be seen as being largely irrelevant because of the way the facility operates.

The credit card is linked to the home loan account. The idea is that your salary is deposited into the home loan facility at the beginning of the month. Throughout the month you make all your purchases on your credit card, taking advantage of the interest-free period.

According to the research company Market faxts, you get up to 40 days interest-free with FAI, and up to 55 days with Citibank.

Instead of paying for your purchases, your salary is being used to reduce your home loan interest during this period.

At the end of each month, the amount outstanding on your credit card is "swept" into the line of credit mortgage and offset against your salary.

But from a credit card point of view, as the balance is paid off in full each month, the interest rate offered is largely irrelevant - unless you get cash advances, where interest is charged from the day of the advance.

Market faxts says this sweeping facility means you won't be paying interest on your credit card purchases for anything other than cash advances. So the claims of cheaper credit card interest rates seem a bit dubious.

"In reality, the credit card at the home loan rate is just another feature of the home loan product," says the company's account manager, Martin Fox.

But where it does help consumers is in helping "disciplined" borrowers to pay off their home loan quicker.

Mike Halloran, managing director of FAI Home Loans, says if borrowers have their income deposited into their FAI Link Line account and then use their credit card and chequebook for everyday expenses, every spare dollar left over goes towards paying off the mortgage.

He says that as well as being available for purchases, the credit card provides an easy means for customers to receive cash advances. Payment is then made at the end of each month when any outstanding balance on the Visa card is automatically paid from the FAI Link Line loan.

"It makes a lot of sense putting all your borrowings into one loan. It's a home loan, overdraft, deposit account and credit card in one," he says.

But you can't get the credit card without the home loan, and used by the wrong sort of customers, the benefits of these home loans can also be their main disadvantage.

They really are best for those that have the discipline not to spend up big on their credit cards, and for those who want to concentrate their efforts on putting as much of their spare income as they can into their mortgage.

Alex Sala, chief executive of Endeavour Credit Union, which will launch its Solutions line of credit home loan with an attached credit card in a few weeks, agrees there would be pitfalls if the product was used by the wrong people.

He says these products tend to suit two-income or higher-income families, and if this doesn't sound like you, you may be better off with a traditional loan.

"The advantage [of Solutions] is as you reduce the balance, it gives you added equity. Each time you redraw you are not subject to extra costs and establishment fees," he says.

To ensure Endeavour won't lend to people who are going to get themselves into trouble with this product, Sala says: "We will try and qualify the account holders in the first instance, and then conduct six-

monthly reviews."

A spokeswoman from Citibank says: "The reality is, if a customer wasn't conscious about saving money he/she may not benefit from this product. But that is not the point of this home loan."

She says the bank would not encourage excess spending on the credit card, which would effectively wipe out the benefits of the line of credit home loan.

So far, however, all of the really cheap credit card offerings are linked to home loans and are not available to those who don't have a mortgage.

Why? Traditionally, lenders have used the argument that as default rates are higher with credit card debt than other types of debt, so the interest rate had to be higher.

But with the introduction of credit cards secured against the family home, the default rate is likely to be much lower, meaning the lenders can be more generous with their rates.

In fact, Halloran says FAI Home Loans doesn't make any profit out of its offering, but that it is there to add to the functionality of its Link Line product.

However, all is not lost for those who want a competitive credit card and don't want to have to take out a mortgage to get it.

There are a swag of cheaper offerings on the cards for non home loan customers as well.

American Express's credit card, for example, offers a rate of 13.85 per cent with up to 55 days interest free, which is cheaper than some of the other mainstream offerings around.

Meanwhile, the SGE Credit Union Visa card, with no interest-free days, is offered at 11.5 per cent, while the NSW Teachers Credit Union and the ACT's CPS Credit Union offer a Visa card with no interest-free days at 11.5 per cent and 10.75 per cent respectively.

The Illawarra Credit Union's Visa card, with no interest-free days, is offered at 10.25 per cent.

Rivkin Discount Finance's managing director, Chris Liberiou, has signalled its intention to launch a credit card at a competitive rate in the next few weeks, and he says it won't be linked to a home mortgage account.

Of course, smart credit users will find all this talk of credit card interest rates largely irrelevant.

This is because by paying off the credit card's outstanding balance in full before the end of the interest-free period, they get full use of their card and the interest-free finance at the issuers expense.

For these borrowers, it is the annual fee that is important - not the interest rate.

REVOLVING LINE OF CREDIT: A loan facility which can be drawn down and repaid at will.

CASH ADVANCES: Money drawn against your credit card. Interest charges apply immediately.

TOP TEN CREDIT CARDS RANKED BY INTEREST RATE

                Home loan       Interest     Annual fee  Interest free

                    linked             rate %                              days
Credit Union of Canberra           Classic Home Loan Visa           Yes
        6.5                  0                  0
Family First Credit Union            Visa Card
 Yes                 6.7              $24                 0
FAI Home Loans                        Link Line Visa
Yes               6.95               $75               40
Macquarie Residential                Asset Manager Debit Card        Yes
       6.99             $120                0
Citibank                                       Mort Minimiser Visa or MC
 Yes              7.25                $30              55
Illawarra Credit Union (NSW)      Visa Resi Secured                    Yes
         7.59                   0                0
Illawarra Credit Union (NSW)      Visa
   No              10.25                 0                 0
CPS Credit Union (ACT)              Visa Debit Card with O/D            No
          11.5                  0                 0
NSW Teachers Credit Union        Redicredit to access O/D            No
      11.5                  0                  0
SGE Credit Union                          Preferred Member Visa              No
              11.5                  0                  0

Source: CANNEX.