By Elizabeth Kerr
If you have a 20% cash deposit then you can pretty much behave like the only straight man at a Hens party; you have the choice of any bank.
However it pays to be choosy because pick the wrong one and you could be left holding back a pony-tail whilst they vomit up tequila shots in a bush.
Banks are climbing all over each other to offer the best interest rates and terms to get your business.
On top of this they usually 'gift' you some cash to 'help' you with your settlement costs.
But let’s be honest most people spend this at Harvey Norman and forgo the enormous amount of free money they could be harnessing instead.
Last week TSB upped their ante by throwing in a iphone6 and last year Kiwibank offered Freedom Furniture vouches and ASB a new TV and Xbox.
On the face of it this free stuff looks like a great idea, you get to move in and pimp your castle with some new stuff.
However when you take a closer look at the numbers you can see why only a fool would accept this over another lender offering cash.
The reason is because of compounding interest.
Everybody has this magic power at their disposal but most lack the foresight or commitment to see it through.
As an example lets say that you’ve saved $100 monthly over 15 years. You’d be forgiven for thinking you’d have $18,000 at the end, but thanks to the power of compounding interest at 4% you actually have a tidy $24,691. The compounding power just handed you an extra $6,691 for nothing. Booyah!!
The magic trick works in reverse as well.
Let’s say you finance $20,000 for something entirely unnecessary and agree to pay the loan back to the finance company over 4 years at 15% interest. By the time the 4 years have passed you have actually paid back closer to $27,000. That’s an extra $7,000 because of the interest.
How does this relate to your free iphone or fancy lounge suite you ask?
Well some banks are still offering cash and if you choose to take that cash and put it directly onto the balance of your home loan you are on your way to kicking some financial arse.
Here’s how it works.
Your new bank promises to give you $3,000 for becoming their customer and instead of spending it you put that on your loan of $450,000 spread over 25 years thus reducing it to just $447,000 from the start.
At the end of the loan the total payments you would expect to pay would be $864,008 If you didn’t put that money on the balance and instead thought the iphone or new couch offer was a good idea you could expect to pay $869,806 – a whopping $5,798 extra!
That directly translates to $5,798 for a plain old TV or Xbox.
If you really wanted those things (which you don’t because you have better things to do with your time and money) then it would be cheaper just to buy them retail.
But what if using one of these providers is the only way that someone could afford to have these nice things for their home?
Remember the money machine rule folks; it is never ever okay to purchase a consumer item using debt.
Especially in this instance whereby you are overpaying for said item by 3 times the amount.
Yes, you might have a fancy couch for your castle but you will be paying for it over the term of the loan and I doubt couches from Freedom Furniture actually last that long anymore and I know iphones wont be the same in 25 years.
No one should ever be reasoning that these home loans would be a good option for anyone.
To be clear lets use a table… I know how much you all like a table ;)
| Home loan $450,000 over 25 years @ 6% interest | Home loan $450,000 over 25 years |
| $3,000 bank contribution (SBS) | Iphone 6 |
| Monthly Payments P&I: $2,880.03 | Monthly payments P&I: $2,899.36 |
| Total paid: $864,008.18 | Total Paid: $869,806.89 |
| Total Interest: $417,008.18 | Total Interest: $419,806.89 |
| Money saved: $5,798.71 ! | |
“But I need that money for moving costs and lawyers fees….”
If you are seriously buying a house for hundreds of thousands of dollars and don’t have a few grand stowed away for emergencies then moving costs and lawyers fees are the least of your worries right now!
Any money that comes to you for doing nothing is good money in my opinion.
Be smart at the start and bank the banks contribution.
If you want to compare bank contributions please see the interest.co.nz link here.
14 Comments
Let's say you move banks, transfer your mortgage, get a slightly lower rate, take the $2000 incentive - You may be paying $700 for solicitors coat in transferring mortgage/bank.
Chances are your current bank will soon be matching the interest rate anyway, as they catch up at various times. This is the current advantage of short term fixed terms.
Then you need to compare the transactional costs and other fees.
The other way is to use another's banks deal to re-negotiate with your current bank.
You need to PV the nominal dollar savings, as of course in normal times a future dollar is worth less than a present dollar and we are talking about a 25 year loan term here.
I don't understand why money experts persist in nominal dollar illustrations which give an inflated view of the benefits. Deflation notwithstanding, every future dollar expense you save will be less valuable than today's dollars, and needs to be deflated accordingly by a discount rate.
Deflating the nominal $5798 will give a far less rosy result. To finish off, the value of the phone needs to be taken off the deflated "saving" to arrive at a true comparison of the two options.
Wow there are some glasses half empty this morning!! Lol. A saving is a saving and an illustration is just that. I illustrate my point in today's dollars because my target audience don't give two hoots about the future, (being half of the problem). You are both right deflation and inflation could make the end result different but the initial decision on which home loan provider to sign up with is still made TODAY so I think its worth keeping it in the present context.
Elizabeth, whats really happening is very different to the confusing information we get via the media.
30 years ago the world economy looked weak and those in power started to worry. They turned to the banks and let them loose to lend as much as they wanted, to keep creating growth.
In 2008 that plan blew up along with the massive bubble in assets it created. Since then it has taken massive intervention by central banks just to keep the bubble limping along.
Our debt based money system is on its knees, the free lunch was not free.
I've just got back from he World Agriculture show in Tulare California. Whats happened in Agriculture is another even more deadly bubble has formed.
The growth in investment astounded me, more cows, more almonds, more grapes, more walnuts,more irrigation.
The new investment has poured into production as people and companies search for yield. This search for yield and ZIRP, has warped the normal market signals you would expect. Yes milk prices are up but product of all sorts is piling up in ports all up the west coast and one day the gates will be opened, US product will pour forth in to a world with reduced demand and a high US$.
I talked to a local who told me his neighboring farm was a 3000 acre table grape operation that was purchased recently by a corporation, ripped out and replaced with almonds, he told me on the otherside of him a massive vineyard is being planted and at present plantings the cental valley will soon replace Nappa as the wine center of California. Beef industry changes require another chapter but we should be worried.
Cheap money in action, destroying capital through overproduction.
Growth is vital in a debt based monetary system and over the last 7 years debt has continued to pile up in housing and agriculture. Interest rates have to fall, they are a symptom of an inability to pay the interest, imagine interest rates at the %12 of my youth? There would be nothing left.
Farm debt continues to climb, like in the USA based on a happy ending in China.
Good luck with that.
That happening, and return via leveraging. Governments trying to force the wheel to turn by pushing up standards and using legislation. Such things only hastened the demise of general retailing, don't see how they expect it to work better for argiculture (which has a lot more hard limits).
One reason I figure time to get out.
While a lot of my spending can seem survivalist; unlike the xbox and iphone they're assets set to return over time.
If getting taxable income is good, getting tax paid deductions better, then not having the expense at all must be best.
Things like double glaze and decent insulation, LED lights, reducing consumption, NOT getting on the iphone-sysphius game, not clocking up TV time, getting vertical hydroponics for some basic vege, Solar Hotwater, some PV, keeping away from consumer debt and fancy magazines. All these things means the market can jump any which way it wants, GST can go to a million percent, private powerstations, pay TV, whatever - the things I've spent my "$3000 rebate" on will keep giving returns for as long as the property is tenanted.
Another thing to consider Elizabeth, with the rebate $3000 (eg) money.
It's the cheapest borrowing anyone is going to get.
Put a $1000 on your credit card? or kick off the $1000 on the mortgage, you can pay it down just as easy off the home loan and it's the lowest price personal loan you'll get. (Almost every "fixed" term loan allows an additional 5% of principal to be paid down in a year.
Check this out - Four Horsemen - End of an American Empire. Brilliant Docu-film that explained the lead up to the GFC. The world had got to a stage where the banks couldn't lend any more money to viable borrowers, so they created a way where they could lend it to 'less-viable' borrowers, then on sold the debt.
The FIAT money system was an financial doctrine devised hundreds of years ago, but only bought to the fore after World War 2.
The big diffrence was that in the US, where it was implemented the most, borrowers who couldn't afford to pay their debt/home loans, just handed the keys back to the bank and walked away from the debt, whereas elsewhere in the world, the debt stays with you until it paid.
I prefer to look at a cash incentive as an interest rate reduction. For example, $300,000 loan, $3,000 cash advance. Taking off $500 for legal fees, that is $2,500 left. Over two years that is 0.42% per annum off the interest rate, say 4.97% instead of 5.39%. At that time one can look around again for another offer.
In effect it is an almost 8% interest rate reduction, ie 4.97/5.39. Not bad.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.