Oily Rag: Make most of low interest rates

By Frank, Muriel Newman

Hardly a week goes by that we don't hear a story from someone who has ended up in a financial mud pool because they did not follow some basic money rules.

No matter how often people are advised how to manage their money better, it seems it is never enough so here are some common-sense tips on how to manage money better.

Put whatever spare money you have into debt repayment. Even small increases in mortgage repayments will add up to savings of thousands of dollars in interest in the long run. Interest rates are low at present, but they won't stay this low. Invest the interest rate savings back into your mortgage so you will be in a better position to deal with an interest rate rise.

If you are locked into a fixed rate loan you would like to repay but don't want to pay break fees (early repayment fees), all is not lost. Most banks allow part repayment without penalty.

One reader from Whangarei had two fixed rate mortgages that had some time to go before coming off the fixed rate. Repaying the loan early would have cost thousands of dollars in early repayment fees, but the bank did allow them to increase their monthly principal repayments by $1000 on each mortgage without incurring any penalties.

Most banks offer this sort of arrangement and it's a good way to make use of savings.

If you are refinancing or entering into a new mortgage, shop around for the best deal. Banks currently have access to lots of low-cost money that they want to lend. Typically, trading banks add a margin of about 2 per cent to the cost of their money and, in today's market, most will shave 0.25 per cent off their rate to get your business.

In terms of a debt strategy, the general opinion of experts appears to be to lock-in short-term fixed rates (eg, 12 months) because the short-term fixed rates are lower than the variable or floating rate. Interest rates are likely to remain low for another year or so which still leaves the opportunity to lock in a long-term fixed rate when the loan comes off fixed rate next year.

Most cities have a free budget advisory service. They will give an unbiased opinion about financial contracts. If in doubt, give them a call.

If you have debt such as hire purchase finance or credit card debts and a mortgage, look at the possibility of consolidating all of the debt into a single mortgage. Mortgage debt is cheaper because it offers more security for the lender.

Avoid hire purchase. The Retirement Commission refers to this as dumb-debt, and it is. Do not be tempted by easy credit. It is an expensive way to buy stuff such as vehicles, furniture, clothes and holidays. It is bad enough that these items lose value. Don't add to your problems by paying interest as well.

If you are repaying consumer debt by monthly instalments, compare the total payments to be made over the instalment term, against the cost of paying up-front. The difference is interest charges. We did a calculation for some office equipment recently which showed the annual finance cost was 17.5 per cent.

If you use a credit card, and many people do to collect reward points, make sure you make payments in full and on time.

Don't guarantee others' debts. We continually hear about people losing their homes because they have guaranteed someone else's loan. Often the guarantor is a parent thinking they are doing the right thing for a child. It's not the right thing to do.

Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips at www.oilyrag.co.nz

- Hamilton News

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