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.
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