[edmundt]

Hi, everyone, pardon me if I'm asking a silly question but from reading the forum, I have this feeling that most people take up mortgage loan of about $200K to purchase a house, even though they may have the spare cash.

Can anyone enlighten me on the reason for such arrangement? :confused: I understand this may make sense if the house is for investment purposes, whereby the rental income could be offset by the mortgage interest paid, thus reducing tax on the rental income. However, when it comes to buying the house for your own residential purpose, how does this arrangement of getting a mortgage loan of 8% be beneficial while you store away your excess cash in the bank at 7%? :roll Or do people re-invest their spare cash for other purposes that brings in better returns? :uhoh

[Avalon]

Well, I cant exactly answer that as for a start if I had $200k in cash hanging around - i WOULD have used it to buy the house instead of taking a mortgage.

However - there are 2 theories that could explain at least why some peopel would do it.

Firstly - revolving credit mortgages are popular here. We have one of these, and part of our mortgage is on this scheme. (about $100k) Now we didnt actually need the whole 100k, as we have some extra savings, so at the moment only about 60k of that is being used. A revolving credit facility is like a big (huge) overdraft limit. So in our case - we have an overdraft limit of 100k, but the balance is only about 60k overdrawn. There are 2 reasons that we have done this - firstly - we dont pay interest on the portion of the "mortgage" that we dont use, we only pay it on the 60k, but secondly - if we need that money in a hurry - we dont have to ask the bank for a new loan - its already "approved" and that mony is available at mortgage rates.

The other thing that we do that goes against the "get rid of teh mortgae fast" is that we are saving to invest alongside paying extra on the mortgage. This money will be used to buy shares to start with - and this was a really big thing to get my head round. Its all very well having no mortgage - but do you have any money to live on AS WELL. My parents are a good example iof this. They have used $200k to buy a stake in our house. With our money, and our mortgage plus thier 200k, we bought 1 big house. They have the money to get rid of at least a huge chunk of our mortgage - BUT they would have nothing to live on (as they have very little income).

Something else I did remember - if you are buying now - the excange rate is very very poor, and in some cases it may actuualy be better to leave some money in the UK, pay an NZ mortgage and then bring the cash over when the rate improves. I cant remember the numbers, but we worked out that if the exchange rate £-$ went up to 2.85, it would be worth us leaving money in the UK for upto 2 years.

Im sure there are a lot of other reasons as well, probably as many as there are people! But there are my thoughts.