Pay Off Mortgage After Costly Debts

Sun Herald

Sunday February 18, 2001

By DAVID POTTS, Business Editor

SO, you're doing the right thing by pretending the interest rate cut didn't happen and making the same home repayments.

Join the club that's what about three-quarters of borrowers are going to do. And to make you feel even better, many financial advisers say that's just what you should do. Even home lenders say it, and the last thing they want is for you to pay off your loan faster since they get less interest.

Sorry, but nearly everybody is wrong.

That's because you should be paying off higher interest rate loans first. Don't have any? Well, what about your credit card? The Grace Bros bill? Or the car loan?

``Many Australians do not realise that they are better paying off their credit cards and car loans before repaying additional amounts off their home loan," NRMA Building Society head Michael Peters said.

Even if you're only blessed with a home loan, it might still pay you to reconsider.

If there's one thing that most of us fall down on, it's having no cash emergency fund. When an unexpected bill crops up, the chances are it'll finish up on the credit card as a charge, or indirectly as a cash advance later.

The catch, of course, is that you have to set aside the money and not be tempted to touch it. A direct debit into a special account might be the go.

By the same token, if you're ever in the happy position of paying off your other debts, you should then use your interest rate windfall to establish the cash fund or add to your home loan repayments.

Don't be tempted to invest your windfall by, say, topping up your shares. Repaying a credit card saves you 16 per cent so, on the top marginal tax rate, an investment would have to earn well over 30pc a year for you to be ahead.

Still, this is a good time to check that you're getting the biggest bang from your mortgage.

Even after the interest rate drop the chances are you're still paying too much if you've got a loan with a bank or, for that matter some of the non-bank lenders, with features you never use.

If you don't want a redraw facility, for example, look at Wizard's el cheapo 6.39pc it's an old-fashioned mortgage that you can't do anything with but is dirt cheap.

Again, what you'd save from moving from a 7pc loan with a bank about $25 a month on a typical $150,000 25-year mortgage you should use to pay off more expensive debts or build up an emergency cash fund.

Even if you want a full bells-and-whistles mortgage since redraws, offset accounts and home equity loans can all mean lower overall borrowing costs you should still look beyond the banks.

Resi Home Loans is offering a 6.65pc mortgage that has all the features of a bank loan bar a cheque and credit card facility (which are coming in a new loan expected to be unveiled this week and set at 6.95pc).

Managing director Peter James warns borrowers not to be lured by very low or honeymoon rates.

``There are a couple of products around that are designed to bring you in the door but you can't do anything with them. There's also a high up-front fee," Mr James said.

And honeymoon rates, which start as low as 4.95pc, mean ``buying a higher price loan at a short up-front discount".