26 Giffard Street
Williamstown 3016
Ph. 03 9397 7275
Fax. 03 9397 1734
Mobile. 0428 310 165
Email. reidcont@tpg.com.au
ABN: 65 111 801 079
www.reidconsultants.com.au

10th March 2006

From standard variable, to fixed interest, professional packs, low-docs, honeymoon rates, offset accounts, line of credit and the list goes on. Add to that the four major banks, the second tier banks, credit unions, international financial institutions, specialty lenders and other non-bank lenders, where do you find a product or combination of products that suit your needs?

There are literally thousands of products available. You have two main choices, do it yourself and investigate, spend time and money researching, contacting and visiting various lenders or use a mortgage broker . A greater percentage of people are using mortgage brokers to help them find the best product mix for their needs.

Contrary to the banks opinion, spin and propaganda, they are not there to assist you. They are there to make money for their shareholders and managers.   When was the last time your bank approached you to offer you a better choice? Did they say you could get a better product that suited your needs at a lower cost, either interest rate or fees?   Let me know and I will go to join!

Why use a mortgage broker? I will cover the reasons to use a mortgage broker in a future newsletter.

What products suit you? This depends on your needs and what key goals you want to achieve. The reality for most people is that they spend as much as they bring in, if not more. What happens is they get caught in a vicious debt cycle, refinancing to cover existing bills and credit card debt, usually using the equity in their home, which has risen dramatically in the last decade, paying off the high cost debt but not doing anything different to change their habits and they spend again using the same credit cards. 2.5 years later, they cannot clear their credit cards, the interest rates they pay are hurting and they refinance again.

Does it sound familiar? You may refinance with your existing lender and be lucky if there is no great cost to do so, however most existing lenders often charge another application fee and possibly another valuation fee if not exit fees etc. If you use a mortgage broker, invariably they will recommend another lender (they get paid more for new loans than the existing lender will pay for refinancing). You are still up for valuation fees and application fees, although some lenders do promotional deals occasionally with low costs.

What is the alternative? You need to set some basic goals and a budget. I covered this in some detail in my last newsletter. The important thing is to be able to plan for both NOW and the FUTURE. Doing the same things as what you did in the past will produce the same results in the future. At least determine what your 'fixed' expenses are, what you are committed to pay, mortgages, debt, loans etc. Then break down the 'flexible' expenses into 'essential' and 'lifestyle'. The 'lifestyle' expenses are the remainder of your income.

Once you know these amounts then there are three steps required.

1. Set up separate bank accounts, one for 'flexible' expenses and the other for 'lifestyle' expenses.
2. From your wages or salary, get your employer to direct debit your 'fixed' expenses directly to those accounts (mortgage, loans etc.), the amount required for the 'essentials' and then the remaining amount into your 'lifestyle' account
3. Cut up your credit cards – unless you have the discipline to pay off in full each month from your 'flexible' account.

The combination of bank products is important. For most people they need to reduce or eliminate their consumer debt, being credit cards that cannot be paid off in full when due, store cards likewise or personal loans used to purchase household goods like plasma TV's. Most people will also have a mortgage that should be paid off as soon as practical, although there are circumstances for folk approaching retirement that other strategies can be used.

For most people, a Principle and Interest (P&I) loan should cover the greater majority of debt owed on your home. If you have a $300,000 home and an overall mortgage of $200,000, then approximately 90 to 95% should be in the form of a P&I loan. The remaining portion could be a Line of Credit (LOC) which gives you flexibility to pay the quarterly bills without having to use credit cards. This is the account used to pay for ‘essential' expenses.

The last account should be a savings account or an offset account (as long as it has EFTPOS capability). This is your account for ‘lifestyle' expenses. It will force you to only be able to spend on lifestyle when you have the funds in that account. It is a forced savings account if you like. There is no credit card attached, you can only spend when you have saved sufficient to be able to afford to do so. It becomes your choice to spend on what you will. This is a critical component that you need to understand and adjust your spending habits upon if you want to break out of the cycle.

I will cover what the other type of bank products are in a future newsletter, professional packs, low doc loans, honeymoon offers etc. These are packages where the lender adjusts interest rates for perceived risks, but they do not alter the need of how to use bank products to your advantage.

Give me a call to find out how to best use bank product to suit your needs and circumstances and what could you borrow based on your income and value of your house, obligation free and no cost appointment, call – 9397 7275

Helping People through Finance