Holidaying on your mortgage

Unexpected events such as a family wedding or replacing your washing machine can make money tighter than usual.

While you might choose not to take the holiday, it’s unlikely you’ll want to live without a washing machine. If borrowing money is something you want to consider to pay for things you haven’t budgeted for, it’s important you work out the most affordable way to pay for it. There are several options: take out a loan, extend your mortgage, use hire purchase or put it on your credit card.

Mortgage

Extending your mortgage is generally the least expensive way to borrow. The interest rate is (typically) less than half what you’d pay on your credit card and by paying cash, you may get a discount that’s worth more than the interest-free terms shops offer on things like a new fridge.
However, it’s best to keep this option for necessities, like a new roof that you can’t put off.

Adding to the mortgage means your loan is larger – so unless you increase your regular repayments to compensate you’ll end up paying more in the long term than you originally intended. There may also be a charge by your lender for any extension to your mortgage that you’ll need to consider.

To work out how much extra interest you’ll pay or to recalculate your regular repayments use the Quick Mortgage calculator under “Managing your mortgage” at www.sorted.org.nz.

So what if you don’t have a mortgage or don’t want to add to your mortgage?

Bank or Credit Union loan

Getting an overdraft from your bank (or a loan from your Credit Union) is probably the next cheapest, most convenient option for you to consider. Of the two, the Credit Union normally charges less but you do need to be a member. You may have an unused overdraft facility at your bank – call your bank to find out. If you don’t have an existing facility, you will have to apply. Unsecured bank loans will cost a little less than loans on your credit card with the main banks charging about 16-18 percent at present.

Personal loan

Personal loans from other lenders (like finance companies) can be an attractive option. Interest rates can range from 10 to 25 percent depending on the company, how much you want to take out, and over what period. It’s important to take the time to shop around to find the best deal and remember to point out your strengths, for example your good credit history, to negotiate the best deal.

If you don’t have a good credit history, you may have to consider the smaller finance companies. They will generally charge higher interest rates than the larger banks to cover the risk that you may default on your loan. To calculate how much interest you’ll have to pay use the Getting into Debt Calculator at www.sorted.org.nz.

Hire purchase

Depending on what you’re buying, hire purchase may be available. Many retailers offer interest free arrangements for a set period but check the fine print for the exceptions and hidden costs; if you fail to pay off the total amount within the interest free period you may be required to pay for the accumulated interest.

Credit card

While credit cards are easy to use they can be a very expensive way to pay for things. Most credit card companies charge interest at 18- 20 percent per annum after up to one month. That can make a $1,000 purchase very expensive.

The key to taking out any loan is to work out how much it will cost you before you take it out. For more information about managing debt visit New Zealand’s free independent personal finance website www.sorted.org.nz.