Monday, 04 May 2015
Is Your Debt Good For You?
The home loan market is in a state of unprecedented change. While the RBA has slashed interest rates to historical lows, the property market is booming, and banks are going head to head in a struggle for market share. This has brewed the perfect storm for borrowers, but first you need to ensure that your debt is right and working best for you.
People everywhere are taking advantage of a lower interest rate environment, and benefiting from the heavy discounting available in the market. Aside the obvious interest rate savings; there are also numerous other potential benefits that you could be taking advantage of. Make sure your debt is good for you – we can show you how.
Lower your interest rate
Lowering your interest rate can put money back into your pocket, loosening the belt on your household budget, and allowing you to enjoy the finer things in life.
The average rate on an outstanding mortgage at the beginning of 2014 was just under 6% according to the Australian Bureau of Statistics. With a falling cash rate and a competitive interest rate market, lender’s today are offering rates well below 5%, and fixed rates in the low 4%’s. A rate savings of 0.5% on a $500k loan equates to $2500 per year – that’s $75,000 over 30 years with the right loan. As long as you suitably consider moving costs, associated monthly charges, and other pitfalls, refinancing could save you thousands.
More often than not home owners will continue to pay the same contracted mortgage repayment as the day they were handed the keys to their home, without delay, change or question. It‘s an unfortunate reality that these loyal clients are often subject to higher interest rates which have come off the back of introductory terms, or simply stuck unawares in obsolete packages and are not privy to cuts in the standard variable rate. Promotional discounts are instead offered to new bank clients and are often not available to their current customer base. You’ll only know if you ask. At The Wealth Connection, we’ve been able to beat 8 out of 10 home loan rates we’ve come across. Do yourself a service and check your debt.
Get your structure right
Loan structure is often overlooked, but is vitally important in making your debt work for you. Interest on an investment property is generally tax deductible, so you should avoid mixing your home loan with your investment loan. As such, you’d look to pay down your home loan as quickly as possible whilst maximising tax deductions on your investment loan. Likewise, you would look to structure the majority of debt and house ownership in the higher income earners name, all of which should be considered in a comprehensive investment strategy.
There are numerous features that lender’s will offer to facilitate whichever strategy you choose and help accelerate the repayment of your ‘non-tax deductible’ debt, whilst preserving any negative gearing benefits to your investment debt. As a general rule of thumb, home loans should be on principal and interest terms whilst investment loans should be on interest only. Similarly, choosing a fixed rate or a variable rate will depend on your circumstances, and should be considered carefully. Variable rates give you flexibility and access to many loan features, but are often priced higher than fixed loans, which are more rigid in nature. Another option is to split between the two to diversify your holdings and sometimes access even further rate discounts.
You might also benefit from 100% offset facilities, free redraw and accessible Internet banking features but again, these features should be weighed up with consideration to all of the above.
Good debt vs. Bad debt
Many of us have called the bank for assistance in buying that new car, paying for a wedding, or footing the bill for a much-needed holiday. The result can leave us with an expensive personal loan or credit card bill that never seems to go away.
Debt consolidation is the process of folding high interest debts into one low rate, usually your home loan. Although it won’t just disappear and you’ll have to pay it off one way or another, it means you have just one set of paperwork to manage, one loan to pay off and can take advantage of significant savings. The interest rate on a home loan is usually far lower than the rate on other types of credit. This lets you save on interest charges and helps you pay off the debt sooner. It can however turn short-term debt into a long-term expense so make sure you try to pay it off as soon as possible.
Equity is the amount of money in your home that you actually own. It can be calculated as the difference between your home’s value and the balance of your loan. So, if you home is worth $700k and you have $400k in debt, you have $300k in equity available. That money could be used to build your wealth with the right investment strategy.
Did you know that you can unlock your equity to not only purchase another investment property if you wish, but also diversify to invest in shares, managed funds or other investment options. Using borrowed money is a strategy that can provide significant benefits but also carries risk, so it’s important to obtain professional advice before making the call.
Debt holding is one aspect of your financial strategy that should be closely considered, and can be a significant player in any wealth creation strategy. You just need to ensure your debt is competitive and structured right. Get in touch for a free health check, and determine if your debt is indeed good for you. The coffee is on us.
General Information warning: This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.