This article was published on 4 September 2004. Some information may be out of date.

QRecent columns described the effectiveness of buying and selling investments — notably houses — via the internet. Smaller investments can use the same method, i.e, family cars.

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

We sold via Trade & Exchange free ads, which they kindly reproduce (also free) two weeks later on their internet site. This delayed listing brings 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 from a discouraged owner who had not had a good response from his paper ads.

The other two cars we bought from Turners car auctions after exploring its web site 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.

In all cases no fees were paid, although Turners do charge an auctioneer’s fee.

AI’m afraid I baulk at calling most cars investments. Only those that increase in value — and that would not include almost all family cars — would qualify.

But, I digress. 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 through TradeMe. 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 out by the AA or similar, before handing over any money.

Thanks for passing on a good tip. For those who want to follow up on it, the websites are www.trade-exchange.co.nz and www.turners.co.nz.

QI 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. Sure, you have lots of citrus fruits, but what are they? A dollar today has a different value from one in 25 years.

This is a practice of the banks that really annoys me. I am surprised that you support it.

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

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 per 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 per month.

If you decrease consumption (one less cappuccino per day), you will have added to your long-term wealth at the expense of your current lifestyle.

If the $100 per month would otherwise be invested, you gain or lose depending on whether the after-tax return on the investment foregone would have been above or below 8 per cent. You also lose diversification benefits.

People don’t generally understand present value calculations, but I think you do them a disservice by perpetuating the misunderstanding that you can just multiply $1000 by 300 months and get the ‘cost’ of the mortgage.

AThis 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.

If we added all of these amounts, they would come to just under $130,000 — the amount of the original mortgage.

It’s tricky stuff. If you can’t quite follow it, the main point is that having to pay money in the future is not as bad as having to pay it now.

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.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.