1.. To save money
By far and away the biggest reason people chose to refinance their home loan is ‘To save money’. Lowering your mortgage payment can also save you hundreds of dollars per month that could be used to pay your home loan off faster, pay for the kids education, update your car.
What would you spend the extra savings on?
2.. To access funds for various personal or financial goals
Other uses for a lump sum in cash are literally endless – you could use your equity to buy your family that long overdue overseas holiday you’ve always wanted or even use it to invest in a business or shares
3.. To release equity for property investment
Property investment is currently one of the most popular ways of building wealth for your future. Whilst saving the deposit to purchase a second property may be difficult for many, rapid rises in property values over the least few years has provided an opportunity for many to refinance and release equity in their home to use as a deposit instead.
4.. To renovate or extend your home
Renovating or extending your current home to meet the needs of your growing family or changing lifestyle is often a better option than purchasing an entirely new home. By renovating or extending, you will be able to create the home that exactly meets your needs and if you’re careful about the improvements you make, perhaps even increase its value at the same time. Even though you will need to access your equity, you may in the end also improve the value of your home to offset this cost.
5.. To consolidate debts
Your home loan interest rate is probably the lowest form of interest you will need to pay on any loan in Australia. Credit card interest rates can be as much as four times higher than your home loan interest rate and this can make credit card debts difficult to pay off. Other expensive debts like car loans or personal loans can also prove to be a drain on your finances.
Click here and let’s see what is possible
Conflicting advice about financing an investment property?
You hear one story from your accountant. Another story from well-meaning friends. And a completely different story from real estate agents.
Sound familiar?
Many of my clients have experienced it too. The problem is, when you follow the wrong advice, that investment golden goose can turn into a confusing nightmare.
For example, a client of mine, Anne (name changed for privacy), a key grip in the film industry, had specific instructions from her accountant for her and her partner (head gardener at Heidi) to buy an investment property. They were given free accommodation courtesy of her partner’s employer which meant they had no rent to pay and therefore had a good disposable income. They figured that this would be a great opportunity for them to create some wealth, put their money to good use, and purchase a property.
Their accountant advised them that their loan set up should be as a principal and interest loan. The aim was to start paying the loan off from day one. Why would you do this? In this case because their superannuation balances were quite low…this was going to be their way of creating their own retirement nest egg. As they had very few expenses they wanted too and had the capacity to pay off the debt quickly.
However, just when all seemed to make sense, one of their friends told them, “You don’t pay principal and interest on an investment property loan. It should always be interest only…you don’t want to pay the loan down, simply pay the interest owing each month as that is the only portion that can be claimed as a tax deduction”. Confusion, now reigned supreme…who’s telling the truth, who do I believe?
That’s when Anne rang me, completely confused. I reinforced exactly what her accountant advised her to do and explained the reasons why. The advice from her friend was wrong in this instance! Simply put her friend was superimposing a view that may have been appropriate for her but it did not reflect Anne’s and her partners circumstance. In this case Anne and her partner had poor superannuation. So by paying their loan down from day one and with impending capital growth, this is going to produce a far superior result dollar wise rather than simply paying the interest payable on the loan.
I don’t believe that her friend was ill-meaning, but everyone’s situation is different and her advice didn’t apply in this case because they wanted to pay the property off quickly to help create some wealth and retirement options.
The next step was to actually find the right property. Anne thought the whole process was going to be really difficult but was pleasantly surprised when I introduced her to a buyer’s advocate who helped source and purchase the property for her and the conveyancer who took care of the legal side of things and ensured that there was nothing untoward in the Contract of Sale and the Section 32 that would adversely affect them.
So, if you’re thinking of buying an investment property, let’s touch base and I can give you an idea on the right loan structure for you. And even put you in touch with a buyer’s agent who can do the legwork for you.
Use your equity…
This one is a little left of centre, considering in previous posts I have been showing you ways to reduce debt. Now, I am going to suggest borrowing more, ultimately to reduce debt. When I first entered the world of finance broking, I would hear stories about people paying off their loan in 10 years. I always thought that only the wealthy could do this; there was no way I could manage to double my repayments to make this happen. Again with our $400,000 loan, at 6%, I would need to pay $2,050 extra per month, on top off the already $2,398. Whoa, a bit of an ask? However, to achieve this aim, you could purchase a well selected investment property. I must stress that this really relies on choosing the right property to achieve capital growth, a property that will double in value every 10 years. This strategy may not be suitable for everyone.
Case Study
scenario
• Current home value $500,000.
• Current mortgage $300,000.
• Current loan repayments $1,610 per month.
• Interest rate 5% per annum.
• Time remaining with mortgage 30 years.
• Total repayments over 30 years $579,438.
Position Year 1.
For ease of illustration I have not included costs such as stamp duty etc. As a rule of thumb in Victoria one should add 5.5% to the purchase price to ascertain associated costs for an investment property.
Position Year 10.
Sell investment property for $800,000 and repay both investment loan and home loan leaving no debt on your current home loan.
End Position
Investment property sold for $800,000. Investment loan of $300,000, paid out. Investment loan of $100,000 attached to own home paid out. Home loan of $300,000 paid out. Own home worth $1,000,000 with no debt. Cash in bank $100,000, time to invest again.
Disclaimer and notes.
Does not take into account principle and interest repayments on existing home loan, balance after 10 years = $244,000. Selling costs and capital gains not taken into consideration for this example. The information provided is of a general nature and we would encourage you to discuss your personal circumstance with your broker or financial planner and or accountant. You should seek professional advice before you implement any new approach to ensure that it is appropriate for your circumstance.
Past results do not guarantee future performance
Pop the Cork, You Now Own the Property
Now that you have your home loan and have moved into your brand new home, here are some really cool ways to pay it off fast. The following techniques are guaranteed to help pay down your loan faster, which will save you interest.
1 – Pay It Off Quickly
The quicker you pay off your mortgage, the less you end up having to pay on it overall. As an example, let’s say that you just got yourself a $400K loan at 6% over a 30-year term. This would mean a principal and interest repayment of $2398 per month. Over the 30-year term, your total repayments would amount to just over $863,000 to pay back the original $400,000 loan.
However, if you have enough spare income to pay an extra $1000 per month, it would reduce your home loan term by a staggering 15yrs and 2 months, saving you over $258,000 in interest. You could put that money to good use and maybe buy an investment property. I am not advocating that you live like a pauper; just make extra repayments when you can. You still have to enjoy life, so don’t be a slave to your mortgage.
2 – Make Accelerated, Fortnightly Repayments
It is easy to make an extra monthly repayment each year without really feeling the squeeze. Simply divide your monthly payment in two and then pay fortnightly instead of monthly. You would make what equates to 13 payments each year instead of 12, as there are 26 fortnight’s in a year.
By doing this, instead of paying $28,776 per year, you would actually pay $31,174. This simple adjustment in the payment schedule can shave up to 4.5 years off your 30-year loan term and save you around $69,000.
3 – Can You Pretend the Interest Rate Is Higher?
As I currently write this, 400K loans receive an interest rate of around 4.6% pa from some of the major lenders, requiring a repayment of only $2051 per month. If you can afford to pretend that the rate is 6% and pay $2398 per month, this self-imposed buffer of 1.4% would mean that you are paying an extra $347 per month.
If you can do this, you will cut your 30-year loan term down to about 21.8 years. Even if 1.4% is not achievable, paying more than is actually required each month, regardless of how much it is, brings down the length of your loan term.
4 – Do I Really Need To Buy That?
Maybe you think it will be too hard to come up with the extra money to put toward the loan. While the methods I have described should be fairly painless, you may find them even easier to actualize if you take control of unnecessary spending. Are you still paying your gym membership, even though you haven’t been there for the last 6 months? Can you give up the smokes? Do you buy your lunch and two lattes every day?
When I had my music shop, I used to buy lunch and have at least two coffees a day. The total cost was about $18 per day (lunch, $12 and coffee, $3.50each), or $90 per week. Allowing for 4-weeks’ leave per year, that equates to $4,320 per year. What would happen if I bought my lunch 4 times a week and had just one coffee a day? My weekly spend would go down to $29.50 per week, giving me just over $60 per week to put towards my mortgage. That equates to $260 per month. I think you get the point.
I am sure there are areas that, if you were honest with yourself, you could find ways to save some money. When you shop for groceries, make a list and stick to it. Cut out impulse buys; do you really need that brand new car when one a few years old will cost considerably less. Can you do public transport?
5 – Lump Sum Payments
Many people routinely receive a large chunk of money, and they generally have all sorts of plans of what to do with it. These may be a lump sum from a tax return or a work bonus. Instead of spending it on a holiday or a new wardrobe, consider putting it towards your mortgage.
A lump sum repayment of $5000 on a $400,000 loan in Year 2 of a 30-year loan, with an interest rate of 6%, will reduce the loan term down to 29 years and 1 month, saving you over $21,000 in interest. Imagine how much it would reduce your loan if you were to receive a refund or bonus every year of a similar amount and put each one toward your mortgage.
The following website has a simple calculator you can use to see how a lump sum payment lowers the loan term and overall cost of the loan.
6 – Use an Offset Account
An offset account is a transaction account linked to your variable-rate home loan. The money in that account offsets your loan balance. The more money you have in the account, the less interest you pay on your home loan. Instead of putting your spare cash into an interest-bearing account, where you earn very little interest and pay tax on the interest you do earn, transfer any spare money you have into your offset account.
Let’s say you could keep a balance of 10,000 per month in your offset account against your $400,000 loan, with an interest rate of 6%. This means that the bank only charges interest on $390,000. The interest payable on a $400,000 loan at 6% is $2,000per month. However, on a $390,000 loan at 6% the interest is $1950 per month. You actually make an extra $50 repayment per month. As a result, you would save around $46,874 in interest and shave about 1yr and 7 months off your 30yr loan term.
Most lender website’s have these calculator’s that you can use to see how extra repayments can lower the time of your loan and interest saved.
To make your offset work better for you, have your salary or wages paid into your offset. If your pay goes directly into your offset account, it immediately reduces the interest you pay on your home loan. Even if it’s only in there for a couple of days, it adds up, and you can still take your money out as with a normal bank account.
With this set up, use your credit card for everyday purchases. To do this, you need to be a disciplined spender, and you need to know how much your monthly expenses are. Keep enough money for your expenses (groceries, utility bills, etc.) in your account, but use your credit card to pay for them instead. This allows you to keep the maximum amount in your account at all times, offsetting interest.
Then, at the end of the month, transfer the money you have set aside from your offset account and pay off your credit card balance in full so that you don’t accrue any credit card interest. It is crucial that you set aside the money for your expenses in your account so that you’re able to pay off all the expenses you’ve put onto your credit card at the end of each month. If you’re not able to do this, you’ll end up paying interest on your credit card. If you’re not disciplined with your credit card, this may not be the best option for you.
7 – Consolidate Your Debts
Many people carry a personal loan at 12% interest and have a couple of credit cards, which they don’t clear the balances on each month, potentially accruing interest charges in the vicinity of 18-20%. Assuming that you have a bit of equity in your property, you may be able to consolidate these debts into your home loan, bringing the interest rate down to 5-6%.
Here is how to make this really work for you; pay the new consolidated loan the sum total of all the original loan repayments. This means that you pay extra off your home loan without really feeling it; you were already paying that same amount every month.
Another left of centre way to reduce one’s mortgage will be revealed in another blog…stay tuned
