The Secret To Paying Debt

September 23, 2013

The Reserve Bank of Australia sets the ‘cash’ interest rate, which is reviewed every month. Credit providers set their own rates and can choose to increase or decrease the rates in line with the cash rate, the graphs below show historically say from January 2002 through to our current ‘cash rate’ 2.50% how these have moved in line with the economy.

 

The std variable rate sits at around 5.91% but there are discounts to entice borrowers, these can depend on many factors such as loan size and lending ratios and lenders appetites for particular business, all of which we will address on your behalf to find the right loan for you. A normal rate now is under 5% so let us investigate your options.


IT COSTS NOTHING FOR US TO LOOK INTO THIS

You will notice in the graph’s below how the cash rates have moved over the years-only was it in Jan 2009 and we were paying 9% but post GFC rates have consistently come down.


THE SECRET TO PAYING DEBT IS WHEN RATES ARE LOW

You will notice a lot of media activity at the moment from the lenders, social media press and TV around what you should do with your interest rate. We believe at Australian Finance Centre that everyone is different and we are happy to look at everyone’s circumstance individually as this is not a one shoe that fits all situations.

 

 

 

 

The big questions is, where are rates going and should I lock my loan in, keep it variable or do nothing as I am too confused, may be a few pointers to help you along the way. If I walk into a bank will they tell me what is good for me or good for them…

 

  • If my interest rate went up to say 8% instead of 5% could I afford it. We cannot predict the future but our belief is that interest rates will drop again, but then they will rise, to what level well that will be determined by economic factors, such as unemployment, global markets and inflation etc. We can review your needs, maybe that investment property that you intend to keep for many years can be fixed for say 5 years in the low 5% bracket-many long term investors who have experienced rates of 10% plus would certainly welcome this, especially if the rent is covering the repayments this then gives you the capacity to use the extra funds to pay off your home loan. Please see the graph below which I encourage our clients to take advantage of low interest rates to pay down debt, not only does it make your asset position better it provides peace of mind having that buffer should the unexpected come along, this gives you comfort if you wish to enter the investment market
     

  • Fixed rates can be very attractive, make sure that there are no limitations as to what you can do, short term fixed rates even though cheap may long term be damaging, especially say if after that rate you come out and the variable rate has risen and you no longer have a cheap loan to enter into. We can always look at combinations between fixed and variable, each way bet……..
     

  • With lower interest rates becomes more affordability, at 8% you might be able to afford a $500,000 property but at 5% it could be $700,000 – However if interest rates did go up could you keep that property, our belief is to look at a long term strategy for you and take into factors such as stopping work to start a family, health issues or unexpected unemployment can we afford to keep our family home. Short term it may be worthwhile to fix say a percentage knowing that your income is going to approve so if rates did go up you could afford the higher payments
     

  • Refinancing just to get a lower rate- This can be disastrous you may save $500 per year but it could cost you $2,000 + in fees, we will not refinance anyone unless there is a clear benefit, again happy to look at your individual circumstances to give you the right advice.
     

  • All loans have advertised rates where you need comparison rates which are the actual rates taking into consideration fees and ongoing charges, our credit guide and proposal will be supplied to you outlining this prior to entering into any arrangement
     

  • Working to a budget if you consolidate the credit cards, car loan and that well earned holiday you now are paying it off over 25 years. We can help you with a budget to ensure that the savings you make pay off the loan, look at the scenario and graph below
     

  • Banks love to promote cheap rates ( we have all bought something cheap only to find out it was sub standard-Let us investigate), cheap is not always good we look for consistency so that we can plan and ensure that a short term fix is not a long term pain
     

  • Certain lenders have different credit scoring to approve your loan, one may decline where another may approve- we understand what each lenders require so we can make sure that your application is offered in the best possible way
     

  • VALUERS In the last 2 years we have had great variation in valuations (again have a look at one our previous articles), refinances we always get valuations done upfront prior to submission and at no cost to our clients, a low valuation can decline a loan, increase the mortgage insurance premium and make a refinance not financially viable, maybe not being able to consolidate all the debt- These variations we have seen can be as high as 20%
     

  • From time to time things in our life go wrong, as mentioned above unforeseen circumstances- Does this mean that you cannot get a loan again, some lenders may persecute you for being slightly older with little asset base, this could be because of a divorce and wishing to start again. If you have had credit defaults, bankruptcy or cannot provide financial figures- tell us your story, what went wrong, what has changed now that you can afford the home loan. We do have funders within our 30+ lenders available out there to help you, it might be a slightly higher interest rate but a way to get back into the game again. Certainly any higher rate loans we will also look at all avenues to get back into mainstream lending again. People have come to us and said we saw this fantastic property but didn’t buy it because either someone said they didn’t qualify or the rate was slightly higher, that property then increased by thousands and they missed out- not only that they ended up paying thousands in rent to the landlord paying off their mortgage
     

  • A medics loan (please see previous newsletter or contact us) to see what savings can be, as these could be in the Thousands, Borrow up to 90% (LVR) of the value of a residential property and pay no Lenders Mortgage Insurance (LMI); contact us to see if you qualify-great for the investor that wishes to leverage high with minimal costs and to maximise interest deductions.
     

  • Buying in your Superannuation, we can assist with setting up the trust to funding a purchase
     

  • All loans considered from, adverse credit to short term employment, no financial figures or hi asset lenders and individual structuring to ensure that properties are not unnecessarily cross collaterised making the loan structure cumbersome
     

  • We have over the last 14 years since Australian Finance Centre was established arranged loans to people Australia wide, From Humpty Doo in the NT, down to Tassie and across to WA, even Australian’s purchasing overseas using their Australian security as collateral. Medics and professional sportspeople’s, mums and dads practically all employment types. Overseas investors trying to capitalise on Australian properties, or overseas clients on visa’s ex pats now living overseas but still wanting a foothold in Australia so that they can still call Australia home
     

  • A lot of people like to leverage investment properties where they do not reduce the debt, we believe a good practice is for these properties to be paying for themselves, you can always invest in more. Build that cash buffer whilst rates are low and don’t over commit. Enjoy the ride, make sure you treat yourselves, have that holiday and don’t die wealthy leaving it to the government
     

  • 1st Home owners-Welcome back into the market, properties have become affordable again and we are happy to arrange your grants and get you your pre-approvals upfront
     

  • If you require advice on Financial planning, accountancy or legal implications even buying property, internally we are more than happy to refer to you to one of our fully qualified practitioners in their own fields to ensure you get the right advice

 


LVR 69.3%

 

Click on the link below to take you to one of our calculators to help you pay the loan off sooner.

I have now used the example above, a new home loan rate of 4.79% and consolidated the debts to give you a new loan amount of $416,000-Based on the new lower rate it now takes the monthly mortgage to as per graph 1 $2,180.09 per month.

 

However graph 2 shows that if you made the difference to what you are currently paying on all your other debts, $3,149 minus $2,180 then you are ahead by $969. You need to have a life so treat yourself but if you paid $500.00 per month extra. Please ensure though if you take this path that you do not go back to the credit cards and high interest rate loans, we are happy to do the budget and monitor for you and give regular advice free of charge as and when needed.

Graph 1

 

Repayment calculator

Graph 2

 

Repayment calculator

 

My recommendation whilst interest rates are at a record low is to pay extra into your home loan as much as possible (You can redraw it at anytime) not just into your offset account, this will reduce the loan much quicker as the offset works as a savings account which generally means spending account for most of us!!!!! Even though you can do the same from your redraw you are less likely to as you see the way the mortgage reduces quickly, I like to receive mortgage statements from clients every 6 months to ensure that it is working, totally optional.

 

Or Visit one of our other calculators

 

Call or email me your scenario and I will personally get back to you.

 

 

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