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4 Things to think about before refinancing or consolidating debt

I have been seeing increased advertising by finance companies offering to simplify and consolidate car loans and credit cards, which most of the time is an incredibly bad idea. But if you have to go down that path, then please consider the following points;

  • More than 95% of vehicle and personal loans are fixed interest contracts, what this means is the interest rate is set, but so are the repayments and the amount you have to repay. If you borrow $20,000 at 7% over 5 years, your minimum repayment will be around $400 per month or $185 per fortnight. But when you settle your loan you will settle owing more than $23,750. Paying the loan out will not get you out of paying the interest back unfortunately. So if you consolidate this into a mortgage, you end up paying interest on top of your previously paid interest. Unless you are in financial dire straits always try to pay the personal car or vehicle loan out where possible.
  • Should you still end up consolidating a vehicle loan, to make it pay in doing so, work out with your broker or bank a payment plan to clear that debt from your mortgage in line with the original loan term, rather than consolidate the repayment into the much longer home loan term.
  • I am sure you all know with a mortgage that most of what you are paying back in the first 5-10 years is the interest to the bank, so if you do decide to refinance to save on rate, or for specific features, try to maintain your original loan term. On an average $400,000 loan over 30 years, you repay a staggering $307,094 in interest over the full loan term, even at the low rate of 4.09% p/a. If you refinance that mortgage 4 years in, back to a 30 year term, you will be adding an additional $46,811 to your original interest bill for that property. So where possible, stick to the original loan term or you may find any saving on rate is sacrificed to paying more interest over the full loan term. But if you need to take the loan back to its full term, then at least make a higher repayment that keeps you in line with your original loan term.
  • Credit cards are another one that many people look to consolidate into a mortgage. Before taking this step do some research to see what other options are available, there are many 24 month low rate or interest free card transfer options, it may pay to discuss these with your broker or bank and set up a payment plan to clear the card in a set amount of time. But keep in mind this will only work if you shred the card and don’t use it throughout that repayment period. It is very easy to say, but you should never put more on your card, or have a higher limit than you can clear in a month.

We all work very hard for our money and debt can be a tool that you can use to help you out along the way. But be very careful of what you are being sold and by whom. Try not to let a 30 year loan turn into a 40 year loan after a few refinances, also make sure your financiers or broker have your best interest at heart and will be there with you and be prepared to be accountable along the journey, not just there to sell you into never ending debt.

In terms of tips for getting out of debt faster, nothing beats a sensible and well planned budget as well as paying a little extra when you can, we have tools available to help you with this.

As always for any questions or assistance, please get in touch.

Property Investors Beware!

Dice and Money

The winds of change are well and truly upon us, with APRA beating their drum trying to limit investor lending across the nation, there are a number of lenders penalising their existing investors or interest only customers.

Some lenders are increasing their rates for new and existing investors by up to 0.47% which is unfair and unusual punishment in our opinion, as it is not just in line with limiting future lending, but punishing and profiteering from existing clientele.

We will be expecting a two tier system to become more and more evident in the short term, but as always there are ways we can help you side step this issue. There has never been a better time to be using an industry lending professional with multiple lender options and sound market knowledge, as a one bank solution for investors is fast becoming a distant memory.

Reserve Bank of Australia

Interest rates – What goes down must come up.

With the current interest rate lows moving in to record territory, many first homebuyers and new entrants to the mortgage market may be in for a rude shock when interest rates move into more normal territory.

Most variable rate lending products are sitting in the high 4 to low 5% range currently, but borrowers should take stock that historic rates in a neutral economy are normally between the 6-6.7% range on a discounted variable rate.

A lot of the shrewd and more highly exposed borrowers are looking towards fixing at least a portion of their loans to look to manage the risk of increasing rates. Because even though we don’t have a crystal ball, if we model the future off historic rate movement, any fixed rate under 6% for 5 years or under 5.3% for three years over the past 50 years would have seen the customer have a win, or at the very least not have a loss.

So try to look at fixed rates in terms of where rates are headed over the fixed period as opposed to where they are now. Because rest assured, they won’t stay low for ever. There are certain rules around fixed products you need to be aware of, so any decisions should be discussed with a lending professional.

Below is a link to an article by Greg Jericho analysing the RBA’s latest decisions.


The opinions above are those of the author and do not constitute financial advice. Any decision on your financial future should be carefully considered and advice and relevant research carried out.  

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