When interest rates are low and property prices are rising rapidly, it is tempting to borrow more.
There is a huge psychological effect on property owners when house values rise. They feel wealthier and more confident. This can lead them to spend more or take on risky ventures and thisoften means borrowing money. It is hard to get through life without borrowing, but there are some basic principles to follow.
Only borrow what you need and only for essentials: The cost of a purchase is always greater with borrowed funds, so keep borrowing to a minimum. You may need to borrow to buy a car, but it doesn't have to be a late model car. Travel, clothes, new smart phones are all nice to have, but borrowing to enjoy life now just makes your life less enjoyable later on.
Pay it off on time and as quickly as possible: While mortgage interest rates have dropped significantly, standard credit card interest rates are still around the 20 per cent mark and store cards are around 25 per cent. Only borrow on cards what you can pay off within the interest free period.
Find the cheapest source of borrowed funds: If you have to borrow for essential spending, shop around for the best deal on interest rate and other borrowing costs. It's better to borrow at mortgage interest rates of 4-5 per cent than to pay credit card and store card interest rates.
Borrow to invest: Investors who are disillusioned with bank term deposit rates are turning to property investment, using their available funds or home equity as a deposit and borrowing the rest. With percentage property value increases higher than interest rates, this makes sense. Caution is needed as interest rates may increase in the medium term and property values may stagnate or even fall.
- Liz Koh is an authorised financial adviser. The advice given is general and does not constitute specific advice. A disclosure statement is free. Call 0800 273 847. For free e-books, see moneymax.co.nz and moneymaxcoach.com.
