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One Response to “Carlos and I Review 4 Points From Our Nashville Seminar”

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   Tel says:

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   Here’s my notes: in Australia a lot of people do use their mortgage as a similar vehicle to Whole Life policy that life insurance companies offer. Banks are geared up for this purpose, they generally split the mortgage so you have a main loan account (the thing you pay back over time) plus an offset account (where you put your additional money, build up equity, and can use as a working account). I did it this way for a while, and it works OK. Any money in the offset account is subtracted from your loan for purpose of interest calculation, so you effectively “earn interest” on the offset in as much as you pay that much less interest on the mortgage.

   Here’s my summary of advantages / disadvantages of this method:

   === ADVANTAGE ===

   * You get a house to live in, so you don’t pay rent, and you get this as soon as you sign up for the loan (instant gratification).
   * The offset account can do anything a regular working account can do, usually including a VISA debit card (depending on the bank) and also an ATM card (often the same card) which is really convenient.
   * The value of the house and land usually goes up in the long term (not guaranteed but very likely).
   * It’s very flexible and the bank really does not ask difficult questions if you pull out equity from the offset account, providing you are ahead of the contractual payment schedule. Do what you like with this money.
   * Although there’s qualification in terms of getting the loan in the first place, after that as long as you keep making payments and the equity is building up, they just don’t care about the rest of it.
   * If you live in the house then when you sell you don’t pay any “capital gains” tax.
   * House prices are manipulated by government in various ways to not crash (our version of the Bernanke put).

   === DISADVANTAGE ===

   * The bank actually keeps the house in their name until it is paid off in full and you must pay an additional transfer fee to get title (this is dangerous, see below).
   * Interest rates in Australia are a bit high compared to other countries (approx 5%), so you end up paying quite a lot of interest on the loan.
   * Mortgage interest rates in Australia are almost always variable and when you do get a fixed rate it will be for only a short time (typical two or three years), this can be good when rates go down, but in the past people have been badly hurt (like in the 80’s we had 18% rates and stuff).
   * Short term there are property bubbles and dips so you can get caught out.
   * As I discovered, the bank makes it difficult to re-negotiate the contract part way through (see below).
   * Houses are expensive, so it’s a heavy commitment, especially in the early years when you have hardly any equity built up and big interest payments. Once you commit to a given house you are stuck with it.
   * If you are irresponsible there’s a temptation to spend too easily because it’s available and people do get into trouble. The compound interest can get out of hand.
   * In Australia you cannot just “walk away” from an underwater mortgage like in the USA… you are personally liable for the debt unless you go through bankruptcy. The bank may sell the house at a loss, and you are up for the difference.
   * When you sell there’s other state taxes they hit you with.

   —-

   In terms of what happens to your loan equity should the bank ever get themselves into trouble and face a bank run, I don’t know. Since they own the asset, in theory your house could be sold out from under you by other creditors during liquidation. You probably would find that your home equity in the “offset account” is about the same seniority as the regular bank depositors so you might not only lose your house but also only get back a fraction of the equity you have been saving. To my knowledge this has never been put to the test in Australia (someone else please speak up if you know a case) and if it ever happens on a large scale I think there might be blood in the streets.

   —-

   I actually wanted to reduce some of the available offset equity and permanently move ahead on the loan payment schedule. The reason is that I had more liquid equity sitting there than I needed and I saw this as a security risk if I ever got hacked or something. I had difficulty even explaining to the staff what it was that I wanted to do… eventually I gave up and just made the focus to pay the whole thing off early and close the account.

   It’s very annoying that a bank cannot grasp this concept of risk management… but that isn’t a problem with the concept, it’s just everyday incompetence you will find anywhere. I could have moved to a different bank and renegotiated that way, probably even sliced a little bit off the interest rate, however additional fees would have been involved.