Planwise financial advisor
The home loan market is running hot. And the reduction in the Official Cash Rate, announced last week, is creating even more home loan activity. But there are some serious warnings to heed, quietly simmering in the background.
It is little wonder many Kiwis are considering purchasing toys – or even taking that overseas trip. For example, a top-up of say $20,000 for a new car or overseas holiday is going to cost the average punter $870 per year in interest at 4.35 per annum. Many have no plans to pay that off sooner – and will tack it on to a 20-year term or longer.
When interest rates increase, let's say an average rate of the last decade of 7.40 per cent, then that $20,000 will cost you $1480 in interest per annum. We frequently see top-ups of $50,000 – the difference is $2175 per annum and $3700 per annum respectively or $41 and $71 per week. That does not include paying any of the principle.
Add to that the cost to update your insurance in line with your increased financial liabilities, and the cost becomes greater. Yet, many Kiwis opt instead to start reducing insurance because it becomes too expensive, and thereby increase their financial risk beyond what they were originally comfortable with. They then become underinsured which in the event of a claim, means the whole family is affected.
There is nothing wrong with leveraging off your mortgage. The key is to do some forward planning before you spend the money!