Chasing the carrot of shortened loans

By Mary Holm

Q. We have approximately $210,000 owing in mortgages and total annual income of approximately $105,000.

We have been approached by a firm called Equiti, which is offering to help us to set up our mortgages in one account, whereby all our incomes (salary, rents, etc) go to reduce the mortgage and hence the interest payable.

We would then pay our bills with our credit card and use the 55 days' interest-free period. The net effect would be to reduce the term of the loans from 25 years to approximately 10 years, depending on how well we coped with the new system.

We would stay with the same bank for loans, and Equiti is offering to help us for six months to adjust. Its application fee is $250, with a further fee of $3550 for entering into its system.

Is this the way to go with mortgages these days? Surely the banks will retaliate in some way.

A. If you're trying to lose weight and someone passes you a chocolate cake, do you take a piece? If you're heading for the gym and someone says 'come for a drink instead,' do you go?

People who are easily tempted should stick with traditional mortgages. But those with a fair degree of self-control can gain a lot from the type of mortgage you're talking about.

Probably, though, you don't need the services of Equiti, or any of the several others offering similar deals. You can do it all yourself.

Most banks and other mortgage lenders have been providing what are called revolving credit mortgages for some years. They used to charge higher interest rates for them, but these days some lenders charge the same as on other mortgages.

Basically, you have one bank account with a negative balance - the amount of the mortgage, which in your case would be $210,000.

If you get a cheque for $3000, you put it into the account. As long as that money is in there, you'll pay interest on $207,000 rather than $210,000.

On your level of income, you're probably not using up all you earn. So, if you keep putting the excess in the account, you should see the balance - and hence your interest payments - drop fairly fast.

To make the most of the system, keep the bank balance as healthy as possible at all times.

Arrange for all your income to be direct credited into the account, or deposit it promptly. And arrange for bills to be direct debited on the final due date.

Pay as much as you can by credit card, and have the credit card bill direct debited on the due date. That gives you up to 55 days longer for the money to sit in your account, reducing your mortgage balance - although sometimes it will be only about 30 days, depending on where you are in the billing cycle.

Setting all of this up may be a bit of a hassle. But it can be well worth it, particularly if you are paid monthly or less often, so you have fairly large amounts of money that you use up only gradually.

Self-employed people, who accumulate GST and income tax before paying it to the Government, can also get lots of mileage out of a revolving credit mortgage.

Could such an arrangement really cut your mortgage term from 25 to 10 years? That sounds a bit rich, although I suppose it could apply in some cases.

But even if you carve just a few years off the term, that will save you thousands of dollars in interest.

In light of that, Equiti's $3800 in charges may not seem too bad. And the firm does, after all, hold your hand for the first six months.

But if you understand what you're doing and are self-disciplined, you don't need that. If not, you're quite likely to misuse a revolving credit mortgage after the six months are up, so you shouldn't get one in the first place.

The major form of misuse is succumbing to temptation.

As you reduce the balance on your mortgage, you'll be able to borrow back up to your limit simply by withdrawing money from your account.

When you bank by phone, for instance, the recording might say something like, "Your balance is $180,000 overdrawn, and the available credit is $30,000."

If your response to that is "let's take a world trip, or buy a boat," you're headed for financial disaster.

But if your response is, "let's get the balance down to $150,000 by the end of the year," you'll prosper.

Your first step is to talk to your mortgage lender about switching all or part of your mortgage to revolving credit.

Q. You give good advice on money matters. But I need to take issue with your suggestion of alternative forms of income activities in Money Matters, January 15-16 and request you be aware of the difference between professional and hobby status.

You suggest a woman supplements her income by "flower arranging? child minding? interior design? gardening? baking? ..."

Please! Interior design is, like all genres of design, a discipline reached by hard-graft study, training, experience and industry qualifications.

In New Zealand the industry is represented by the Designers Institute of New Zealand (DINZ), which requires high professional standards of its members and works hard to raise public awareness of this.

When a professional like yourself publishes a suggestion that interior design might be a pin-money option, it does not assist me or my design-profession colleagues in any way.

Perhaps you meant to suggest "interior decoration" - a component of "interior design" work and worthy in its own right.


A. Funny I didn't hear from people with diplomas in floral art, nannying, horticulture, or cookery.

Perhaps they're not quite so touchy - or not quite so good at raising "public awareness" by writing to columns.

Don't get me wrong. Qualifications and membership in industry organisations are great. They show that you know what you're doing (I hope).

And, if there's a dispute about the standard of work or payment, it's usually easier to resolve through an industry organisation.

In the end, though, it's the work someone produces that counts.

I've got a friend who is hired by quite a few people to help with their interior design, after they've admired her work in other people's houses. She has no qualifications in that area.

It's the same in journalism. I've had lots of training, but there are people who can out-write me who have never taken a writing lesson.

Only in areas like medicine and the law should the unqualified be excluded.

Beyond that, it's up to "professionals" to show that all that "hard-graft study, training, experience and industry qualifications" has made them better performers than those without qualifications.

By the way, the woman in the January 15-16 letter needed more than a hobby and pin money.

For all you or I know, she might take up interior design seriously, and end up better qualified than you are.

Q. Would you please explain why the international exchange rate value of the Tongan currency has consistently been higher than the NZ dollar, up until very recently?

Similarly, the Fijian currency has soared above the NZ dollar.

Who are the people or organisations who manipulate or pull the strings to engineer the higher relative values of the Fijian, Samoan and Tongan currencies, compared with the NZ dollar?

I have sought this information from senior bank staff and various seminar speakers and financial planners. None of the above has been able to answer the question.


A. Let's see if I, with a little help, can make it clearer.

In broad terms, says a Reserve Bank expert, "the Fijian and Tongan currencies are fixed by their central banks to a basket of the currencies of the countries they trade with."

In those baskets are the New Zealand and Australian dollars and, in Fiji's case, some major currencies such as the yen.

As you may have noticed, our dollar has fallen against the Aussie dollar and the yen over the past year.

With Fiji and Tonga pegged to baskets that include those currencies, our dollar has fallen against the Pacific countries' currencies too.

So, in answer to your question about "the people or organisations who manipulate or pull the strings," it's not quite as sinister as you make it sound.

The market - the collective wisdom of everybody who deals in kiwi dollars - sets the value of our currency.

And, as the Reserve Bank man says, "the way in which these Pacific countries set their exchange rates means that when the New Zealand dollar is dropping against major currencies, it tends to drop against these Pacific currencies."

The reverse, of course, is true too. If our dollar rises against the big boys, it should rise against Fiji and Tonga as well.

* Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. We cannot answer all questions or correspond directly with readers.