Anz Blows Whistle On Loan Packages
Sydney Morning Herald
5 March 1994
JOCELYN EASTWAY
WHEN one bank introduces a product innovation or a cut in home loan rates, other banks tend to follow suit quick smart.
But ANZ has certainly bucked the trend where personal loan consolidation is concerned.
While several banks have followed the Commonwealth's lead in promoting loan consolidation as the latest craze in retail banking, ANZ has taken out full-page newspaper ads warning of its dangers.
The Reserve Bank's changes to capital adequacy guidelines last year mean banks can now afford to offer personal loans at the same interest rate as home loans, with residential property used as security.
Following on from this is loan consolidation: the ability to roll your home loan and your personal borrowings into one package, all at a home loan interest rate.
The chance to pay off your car or holiday at 8.75 per cent, rather than 13 per cent, may sound very tempting. It could certainly make a big dent in your monthly repayments.
But as ANZ says: "The trouble is, there would need to be a lot more of those monthly repayments to make." In other words, you could be paying off a lounge suite over the full term of your home loan (say, 25 years) and boosting your total interest bill.
As an example, ANZ assumes you want to borrow $5,000 to buy some furniture
With a regular personal loan at 12.75 per cent, your monthly repayments would be about $168, and the furniture would be yours after three years for a total outlay of $6,044.
If you roll the borrowing into a 25-year home loan at 8.75 per cent, you'd reduce the monthly repayment from $168 to $42. But over a 25-year period, the total cost of the furniture would come to more than $12,000.
Of course ANZ has an alternative: take out an ANZ supplementary loan, secured by a first mortgage over your house.
This way you can still pay off your lounge suite at a home loan interest rate but within a normal personal loan time frame.
Your monthly repayments would be about $159 and the furniture would be paid off after three years for a total of $5,704.
National Australia Bank has lashed out at ANZ, claiming that its ads"portray a rigid and outdated approach to lending that is out of touch with customer demands for flexibility".
In a briefing paper on loan consolidation, NAB says: "Personal borrowing consolidation offers home owners real benefits such as interest savings, simplicity and flexibility, regardless of the method they use to consolidate. Recent ads by competitor banks are unfortunate because they complicate consolidation and may discourage some home owners from investigating the benefits for themselves."
NAB says the examples used by ANZ in its ads "reflect neither the reality in the market place nor the common sense and wishes of home owners".
NAB gives you a choice: either you can consolidate all your personal borrowings and keep your home loan separate (basically the same deal as the ANZ "supplementary loan"), or you can roll your personal borrowings into your home loan.
In both cases, you are charged the current variable home loan rate of 8.75 per cent per annum on all your borrowings.
If you choose to roll your personal borrowings into your home loan, it's quite possible you could end up paying more interest in the long haul.
But NAB encourages people to leave their personal loan repayments at the higher level so they can actually cut their total interest payments and shorten the term of their loan.
The bank says people who choose to lower their repayments usually have an immediate need for extra cash. But once their finances start looking a bit healthier, they are encouraged to boost their repayments (and/or make lump sum payments).
In other words, dropping your personal loan repayments to the 8.75 per cent rate could boost the "projected" total interest cost of a consolidated loan. But if you lift your repayments later on, you could end up paying less interest in the long term.
In deciding whether to keep your personal borrowings separate from your home loan or roll them all together, you also need to think about the size of your personal borrowings relative to your home loan.
NAB gives the example of a couple with a $90,000 home loan and personal borrowings (for a car and furniture) of $15,000.
They are advised to consolidate the personal borrowings separately from their home loan because the personal debt is small relative to their home loan.
Loan consolidation is one product innovation that has divided leading players in the retail banking industry.
It will be interesting to see if this week's launch of Westpac's Options Home Loan prompts other banks to follow suit or to criticise this latest innovation (first offered by MLC Building Society).
The concept is simple: if you make more than the minimum repayment on your mortgage, the Options Home Loan lets you withdraw the extra payments at any time and for any purpose.
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