Jill Kerby

DON’T FALL FOR THE HYPE:  ALL CREDIT COMES AT A PRICE

Not everything is as it seems, especially when it comes to money and financial products.

I was at a movie the other day and one of the pre-film advertisements was about the mortgage offer from Permanent TSB.

Up there on the giant screen was a buy-now-pay-later offer of 2% of the value of your new mortgage as ‘cashback’ – enough, claimed the ad, to kit out your home right away instead of waiting until you have the spare income or savings.

It sounded tempting: PTSB lends you say, €200,000 so that you can buy a €240,000 house.  (You have to come up with the €40,000 yourself under the 20% down-payment rule). It then gives you back 2% or €4,000 - in cash.  You buy your sofas and curtains and wide-screen TV.

But hang on, I recall the same bank, back in the bad old days of the property boom, offering mortgage holders their very own mortgage loan chequebook in which you could write cheques worth up to €3,000 against the equity in your house.

The problem with that offer – and this one - is that mortgages are long term loans, usually 25 or 30 year durations. Buying a short-term consumer good like a sofa, telly or even a holiday with cheaper mortgage debt may seem clever compared to paying much higher personal loan, credit card or hire purchase interest rates, but these loans are designed to be paid off over a relatively short term and long before the goods need to be replaced.  Paying off a €1,000 sofa over the remaining term of a 25 year mortgage, even at just 3%-4%, is complete madness. (See www.bonkers.ie for mortgage rate offers.)

PTSB’s mortgage rates are certainly not the most competitive on the market. This one starts at a variable rate of 4.2% which can change at any time. Opting for this gimmicky loan, which also includes a one year 0.5% interest discount and some ‘flexible’ payment options including another boom-time feature – a “payment holiday” -  is going to cost you a lot more than if you picked one that doesn’t come with bells and whistles.

This smoke and mirrors treatment is common in lots of financial products, not just mortgages.  But sometimes consumers see through the smoke…like they are doing all over the world in their use of conventional credit cards.

A recent survey of non-cash payments and the use of credit, debit, prepaid and contactless card use here has shown that we are moving ever closer to a cashless society.

Visa Europe reports that we have spent €31.7 billion with these cards in the past year, a 12% increase on the previous 12 months and that more than €1 in every €3 spent by Irish consumers is with these cards.  Meanwhile the number of transactions on Irish Visa cards increased by c16% over the same 12 months to a whopping 584 million transactions.   Even business to business spending with cards is up 17% to approximately €6.5 billion worth of transactions and now accounts for 21% of all Visa card transactions.

The use of cards instead of cash is growing everywhere and for good reason:  they are convenient, easy to use and widely accepted.  Cards that are lost or stolen can be replaced, but unlike cash they come at a significant price. Not only will you pay an annual stamp duty (€5-€20 depending on the kind of card), transaction fees every time you make a purchase, but also exorbitant interest rates on the credit card – typically 18% or more - if you don’t clear your balance every month. Even more penal charges apply if you miss making a payment and as anyone who has ended up seriously in credit card debt or even having to apply for a Debt Relief Notice (for unsecure debt up to €35,000), the misuse of their credit card proved to be disastrous.

The good news is that we are all becoming more discerning about how we use these ‘flexible friends’. In a release last December, the Central Bank reported that the value of spending on lower cost debit cards, which require you to have sufficient funds in your account to meet the transaction value, is now over 2.5 times higher than on credit cards, which give up to 56 days ‘free’ credit but then charges that double digit compound rate of interest on the debt.

We may be spending billions every month with plastic cards, but more and more of the transactions are straightforward purchases or ATM withdrawals rather than credit based.

The more people switch to debit cards, the less overall interest they will pay to the card providers.  A typical credit card user who only pays the minimum balance can rack up hundreds of euro in interest payments…over a lifetime it can amount to thousands. (See www.consumerhelp.ie for best credit card interest table.)

Just like paying over the odds for a “flexible” mortgage, rather than a basic one with a lower interest rate…

Jill’s 2016 edition of the TAB Guide to Money Pensions & Tax is now in all good bookshops. If you have a personal finance question for Jill, email her at jill@jillkerby.ie or write to her c/o this newspaper.