Some people will pay for a holiday using their mortgage even though it will cost them more in the long run. Pic/Supplied.
Some people will pay for a holiday using their mortgage even though it will cost them more in the long run. Pic/Supplied.
People will pay for a car or holiday on their mortgage even if they know it will cost more in the long run because it gives them more money in the hand for now, research has found.
Auckland credit union NZCU asked its members what would be the cheapest wayto borrow $15k for a car or other big ticket purchase; a personal loan with interest of 12.95% per annum paid off over four years or topping up a mortgage at 6% over 15 years.
While 86 per cent correctly selected the personal loan option; when matched up with actual behaviour it was found that even some of those who knew topping up the mortgage would cost them more chose it because it made their weekly payments lower.
When asked why they made that choice some mortgage holders admitted they were over-committed with debt when they topped up their mortgage and couldn't afford other repayments.
However most just wanted to have more left in their pockets today regardless of the long term cost.
Rob Collins, general manager Credit Union Auckland said a large part of the economy was being fueled by an over-reliance on long-term borrowing.
"Adding it on the mortgage has become a way of life for some people despite them knowing or acknowledging the pitfalls."
Collins said its research had revealed that while people understood they would pay more if they added holidays, cars and new appliances on to the mortgage they went for the short term gain of lower repayments versus the long term pain of more interest.
Collins said it was a difficult decision to understand from a rational perspective.
"We found this a difficult rationale to understand, that people would choose to pay thousands of dollars in extra interest than pay off the loan quicker and get debt free."
He said it was an area where more financial literacy was needed.
How much would borrowing $15k cost in interest? a)Borrowing on a personal loan at 12.95% over 4 years? $4298 b)Borrowing on a mortgage at 6% over 15 years? $7784
