Hikaru25遊樂場

There's more than a little funny business going on with banks and home loan interest rates right now but for anyone taking out a mortgage, especially their first mortgage, the Commonwealth might be doing a favour in scaring everyone.

One of the reasons why our housing market - and therefore our banks - is so much healthier than just about all the rest of the developed world is that Australians are world champions at paying down their mortgage.

It's been drummed into us for some years now that your home loan is "bad debt". Of course it's not "bad debt' the way expensive credit card debt is - you are using the debt to buy something of lasting and, hopefully, appreciating worth - but this type of "bad" just means it's not tax deductible. Therefore, it's a good reason to get rid of it sooner rather than later so that you're free to use "good debt" i.e. tax deductible, to acquire other growth assets.

But before you can pay off your mortgage early, you have to be able to afford to. The dangerous part of sooling first-home buyers into the real estate market when rates have been at record lows is that they might gear themselves to the eyeballs and budget just for repayments at the current level.

A responsible lender shouldn't allow borrowers to do that, but sometimes buyers get carried away with their new home and, by one means or another, it happens.

Just as interest rates can fall, they can and will eventually rise. Thus it's vital to "pretend" rates are higher than they actually are, to factor in repayments based on, say, 7.5 or 8 per cent interest.

There are two benefits that flow from that: First, if rates rise, you know you can handle it because you already are; secondly, the higher repayments right from the start are eating into the big total interest bill that an owner-occupied mortgage builds up.

Because Australians tend to pay down their mortgages relatively quickly, most of us have built up a buffer of equity in our homes so that if hard times do strike us, we have a safety margin. That's why the banks are prepared to capitalise interest payments for one year for people who lose their job in this recession - not because they're charitable institutions.

The Americans on the other hand are terrible at reducing their mortgage as they M. Mouse system encourages them not to. For a start, owner-occupied home loans are tax deductible there, so who wants to get rid of a tax deduction? American mortgages also typically are 30-year fixed loans that are regularly refinanced at little or no penalty when rates are down...so they just sit there, racking up interest.

And that's part of the reason why one in every eight American mortgages now is either in foreclosure or late in its repayments. Not a nice situation at all.

So don't wait for your bank to put up your interest rate - do it yourself in your own mind. It will help keep first-home buyers out of trouble and speed up the acquisition of a valuable asset.