Driving a hard bargain

By MARY HOLM

Q: Recent columns described the effectiveness of buying and selling investments - notably houses - via the internet. Smaller investments can use the same method, for instance family cars.

During the past two years, we have bought three cars and sold three.

We sold via classified ads that were also reproduced on the internet. This brought in a whole new group of potential buyers and resulted in one of our sales.

We also bought one car by this means at a good price.

The other two cars we bought from car auctions after exploring websites night after night until what we wanted showed up. No wasted travelling time looking all over town and haggling with dealers or owners, and the price was right.

A: I'm afraid I baulk at calling most cars investments. Only those that increase in value - and that would exclude almost all family cars - would qualify.

But investment or not, most of us can't do without a car. So whatever it takes to make it easier and perhaps cheaper to buy and sell them has got to be good.

Things sometimes go horribly wrong with internet trading. A man was in court recently after selling more than $10,000 worth of goods. He took the money, but didn't deliver the items.

In your case, though, everything went smoothly. I presume you used the internet for what it is so good at - getting information - and didn't actually buy any cars without seeing them.

I would certainly want to test drive a car and get it checked by the AA or similar, before handing over any money.

Thanks for passing on a good tip.

* * *

Q: I must take issue with a recent column where you add together all the mortgage payments over 25 years and hence imply that each payment has the same value.

It's like adding lemons and oranges. A dollar today has a different value from one in 25 years.

Let's say you have a mortgage of just under $130,000, with an interest and principal payment that is $1000 a month for 25 years and the interest rate is 8pc.

The last payment in 300 months' time will cost you $136.24 in today's money. You've spent 300,000 citrus dollars but, in today's money, your mortgage cost its original amount, less than $130,000, to pay off.

Now let's say that you could afford to pay $1100 a month instead. Your mortgage would be paid off in 232 months and you will have paid about 255,000 citrus dollars but, in today's money, it still cost the same $130,000.

The impact on your "wealth" is determined by what you would otherwise do with the extra $100 a month.

A: This is all getting a bit marmaladey. But you make an excellent point.

In other contexts, I've written about the time value of money and I should also do it when talking about the total cost of a mortgage.

Let's assume we've always got several thousand dollars of spare cash, so availability is not an issue.

If we have the choice of paying $1000 now or in a year, we should always choose to pay in a year. Ten years would be better still.

This is partly because of inflation, which makes it easier to come up with $1000 in the future. But the time value of money applies even when inflation is zero.

The point is that, if we pay later, we have options. We can earn a return on the money in the meantime, or buy luxury goods now and enjoy them.

In that case, shouldn't we turn down the option to make more than minimum payments on a mortgage?

Not necessarily. The difference is that we have to pay interest on a mortgage. At 8 per cent, we choose between paying off $1000 now, or roughly $1080 a year from now, or more in the future - perhaps about $1700 in seven years when we sell the house.

If, instead of repaying the mortgage, we invest the $1000 and get an after-tax return higher than 8 per cent, we come out ahead. We can pay the $1080 in a year or the $1700 in seven years and there'll be some left over.

But if the investment return is below 8 per cent, we'll have to put in extra money from elsewhere when we pay later.

Okay, everyone, are you with me so far?

What does the correspondent mean when he says that a $1000 payment in 300 months, or 25 years, will cost $136.24 in today's money?

If we invested $136.24 at 8 per cent after tax, it would grow to $1000 in 25 years. For the payment due in 24 years and 11 months, we would need to invest $137.11; for the one before that, $138.10 and so on, right up until the payment due today, for which we would need the whole $1000.

So when we say that a $130,000 mortgage costs $300,000 over 25 years, it's true, but in some ways it's misleading.

* * *

Email us your question about money