Page 26 - Smart Money

Chapter 1

Case Study (cont.)
The reality is that he still has to pay. The repayments are going to go up
on Property B as well as down on Property A, so he is no better off for
doing that. He was quite upset when he realised that was the case.

Another good example is when someone has a mortgage and a term
deposit. Instead of putting the money from the term deposit into the
mortgage so that it directly off-sets the mortgage and reduces the
interest, they keep it in the term deposit, because they are getting
3% interest on the term deposit. But what they forget is that they are
paying 4% or 5% interest on their home loan. So why would you have a
term deposit that is making 3% interest, and that you are paying tax on,
when you could actually have that money offsetting your mortgage at
a higher interest rate?
Another scenario we often see with clients is when a friend has just
consolidated all their debts into their home loan and they want to do
the same thing. Or, they want to buy a house and put all their debt into
it, but they’ve only got a 5% deposit. They don’t understand why their
friend was able to do it, but they can’t. Most likely, their friend has got
equity in their house, so there has been room to move on the mortgage.

With a lack of savings, it is easy to get into trouble if something goes
wrong. A good example, again, is the guy working in the mines, having
all the toys and thinking life is great. He does his two weeks on, one week
off shift, has his jet-ski and boat, and then he loses his job.

These guys usually don’t insure themselves, either, so he probably has no
income protection, which would obviously cover him if he lost his job for
a few months, depending upon the cover. He just relies on keeping his
job or getting another job in the same industry that pays the same or at
least similar income. But we all know that if he has to come back to the
city, he is not going to get paid the same amount of money, and that is
when things start to go wrong with repaying his debts. He doesn’t make
the repayments on the boat or the car or house, and then he is looking at
losing it all. If he had been insured, things might be different.

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