Seven Easy Ways To Smash That Home Loan!

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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.

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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.

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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

 

Suggestions Rates Could Remain As Is For Next 12 Months

The Reserve Bank of Australia has forecast that the cash rate will remain at a record-low 2.5 per cent for at least one more year.

The board agreed that a period of stable interest rates was the most sensible course of action, according to the minutes of its recent monthly meeting.

What Is The Role Of A Conveyancer

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Conveyancing is the process under which the ownership rights of an estate of land is transferred from seller to purchaser.

The primary role of the conveyancer is to ensure that the property is transferred to the new owner free of any other interests. Secondary to this the conveyancer co-ordinates on time settlement of the transaction by liaising with each of the relevant parties (the vendor and his/her conveyancer, lender, real estate agent, and the purchaser and his/her lender, and the settlement agent).

The conveyancing process starts on the signing of the contract of sale and concludes with the successful post settlement Registration of the Certificate of Title.

When acting for a purchaser who has signed a contract, the conveyancer undertakes the following:

1. Conducts a Title search to obtain up to date information as to a. the registered owner of the property b. encumbrances registered on title, and; c. any dealings affecting the Title but not yet registered.

2. Investigates ‘Off Title Restrictions and Interests’ including but not limited to: a. Zoning (permitted use) b. Rates & outgoings c. Road proposals via Vicroads d. Heritage e. Land Tax f. Building approvals

3. Review & validation of the Section 32 Vendor’s Statement & The Contract

4. Manage Section 27 Deposit Release request

5. Arrange for discharge of the vendor’s mortgage and any caveats over the property prior to, or at settlement.

6. Provide a Statement of adjustments covering apportionable outgoings to be paid at the day of settlement.

7. Preparation of Transfer of Land documentation

8. Co-ordination of final inspection

9. Co-ordination of the settlement appointment. 10. Attends settlement and the exchange of documents.

 

Post settlement the conveyancer:

1. Prepares a Notice of Acquisition for the local Council and water authority.

2. Completes Title registration

3. Co-ordinates payment of Stamp Duty.

Thanks to Craig Hemer

How does a Business Owner get a Home Loan?

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By paying tax, that’s how!


The Rules of Lending have changed and this is having a dramatic impact on Business Owners wanting to borrow for a home.

It has not become any more conservative and credit policies have not contracted all that materially from 12 months ago.

What has changed is that lending decisions today are becoming increasingly more evidence-based than ever before. And they need to be, to be compliant. This then leaves very little scope for “exceptions”

What This Means for You?

3 things:

1.    It will be your “taxable income” as evidenced by your ATO Returns that will determine what you can borrow.
2.    How consistent your earnings is as important as how much you earn
3.    No amount of cash deposit or real estate collateral will have any impact on 1. and 2. above

Taxable Income

•    This is the key driver that determines how much you can borrow.
•    The lender will ONLY accept as “taxable income” what you declare to the ATO
•    If you don’t declare your cash earnings, neither will the lender!
•    If you claim all your travel, holidays, food, and household expenses as a tax deduction to reduce your “taxable income”, then so will the lender!
•    2 consecutive years evidence, no more than 12 months old
•    Where earnings are inconsistent, use the average

This is making it difficult for some Business Owners because “what they declare” in no way represents what it is they actually earn.

Last time they needed money, they only needed to “declare” an income, self-witnessed. Now they need to prove it and not just with some internal MYOB printout, but full and complete set of ATO Returns.

Business Owners need to appreciate that it doesn’t matter what you OWN or how little you OWE. It is what you EARN that determines HOW MUCH you can borrow.

For example, if you own $10 million worth of real estate unencumbered, but declared just $20,000 a year “taxable income”, you could only borrow @ $35-40,000 *.

*Assumes single applicant, no dependants, no other loans or financial commitments 20/10/10

How to Survive now the Rules of Lending have Changed

  •  Get Finance Approval IN WRITING BEFORE you go shopping!
    •    It’s all about “taxable income” so keep your ATO Returns up-to-date
    •    PLAN BEFORE YOU BORROW. If you intend borrowing, alert your Accountant ahead of time so that you can make financial plans and perhaps change strategy from tax minimization to income maximization for the next 1-2 years.
    •    Remember, once its down in “black and white” it’s there forever!
    •    A low “taxable income” may negatively impact how much you can borrow for the next 2 years.
    •    As a general rule, the higher your “taxable income” the more you can borrow
    •    So it may be in your best interests to pay a bit more tax today if it means being able to afford your dream home tomorrow.

 

For example:

Small Business A
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Small Business B
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Small Business C
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*Based on Citibank Serviceability Calculator 20/10/10. Assumes single applicant, no dependants, no other loans or financial commitments

 

What about Lo Doc loans?
There is much uncertainty and many conflicting opinions about the future of these types of home loan products, as they stand today.

Released a decade ago, these loans were originally designed to suit the needs of Business Owners whose financial records were either unavailable or not reflective of the current financial position of the business.
Instead of producing ATO records, the Business Owner only had to “declare” an income based on his own self-assessment of what his business currently earns. No further questions asked.
Depending on equity, today that same Business Owner will have to supply:

  •  Evidence of ABN registration 2 years
    •    Evidence of GST registration 2 years
    •    BAS Statements and/or Bank Account Trading Statements for the past 6-12 months

And will be charged more and be required to have a higher deposit than Business Owners who are able to borrow “mainstream”.
Talk to your Mortgage Broker

Speak to a suitably qualified Mortgage Broker who has experience in dealing with Business Owners for professional advice on:
•    How much you can borrow
•    Which lenders best suit your needs as a Business Owner
•    What products you should consider
•    How to best structure your finances
•    What documentation you will need to prepare, and
•    Making the finance application

 

Property Investing Tax Tip

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We have heard again recently that the ATO are going to be looking closely at claims for repairs to investment properties this year. So be careful. Remember, a repair means to restore something to the condition it was in when you bought it.

A common error made by property investors is incorrectly claiming repairs done straight after you bought it and before tenants moved in. In this case, you are ‘improving’ the property and you will have to depreciate the cost of that work.

This is the case even if the repairs were essential. You need to get this right, because it is an easy one for the ATO to check. Best to ask your accountant and claim correctly.