'I gave away a Ferrari'Posted to Financial Capability on 05-04-2016
Car-mad Martin Farr felt pretty sick when he realised he had given away his Ferrari.
He’d bought a new home and was so caught up in the euphoria of getting his first step on the housing ladder, that he didn’t do his maths.
And that basic mistake proved costly.
By tweaking his repayments when he bought his house, he could have saved himself enough money to snap up the wheels of his dreams - a very nice 2006 Ferrari with less than 20,000km on the clock.
He said: “When you’re house-hunting you can get a bit of tunnel vision. You can be so focused on whether the bank will lend you hundreds of thousands of dollars, that you don’t stop to think about how much you are going to be repaying in total.”
And the numbers can be big. As big as a luxury Italian sports car.
If you borrow $600,000 over 30 years at 5.75%, your home will end up costing you more than double that – a whopping $1.26 million.
Farr is not alone in being blinded to the true cost. Many New Zealanders could be tens of thousands of dollars better off in the long run if only they made some small changes using the new Sorted mortgage tool.
It shows how an extra $175 a fortnight on a $600,000 mortgage could save you $164,000 in interest. You’d be rid of the mortgage six years earlier – and have enough money for that Ferrari. Even $50 more a fortnight would save $59,000. Enough for a brand new Ford Territory.
David Boyle, investor education GM at the Commission, said: “When house prices rise, especially as much as they have in Auckland, it’s easy to have a feeling of wealth. But if you think about how much you are paying in total, it’s a different picture.
“By using the mortgage tool on Sorted you can see exactly what your home is going to cost by the time you’ve paid all the interest.
“But more importantly you can play around with the tool and see how switching your payments from monthly to fortnightly, and increasing them by as much as you can afford, can make a significant difference to your overall financial wellbeing.”
As interest rates reach record lows, many people with floating rates on their mortgages greet a cut with glee, seeing it as a chance to reduce their fortnightly payments and put more cash in their wallets.
It’s an attitude that the lenders do little to dispel because it’s in their interest, but it costs the borrower dearly in the long-run.
A change of mindset to keep the fortnightly payments the same, but at a lower interest rate, will get rid of that debt faster.
Farr has changed his repayments to get his Ferrari back. Boyle says those who aren’t fans of flashy sports cars can use the money they’ve saved to buy whatever is top of their own wishlist.
Next: A train ride conversation about wills