4 Things to think about before refinancing or consolidating debt

Written by Michael McKenzie on November 23, 2015. Posted in Uncategorized

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.

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Low rates, how can you cash in?

Written by Michael McKenzie on February 2, 2015. Posted in News

There is a lot of talk about interest rates decreasing in 2015, but what does this really mean for you? It will give the investors and owner occupiers a bit of confidence in the short term.

But how can you cash in on these historically low rates for the longer term?

The answer is simple, you need a good plan and it is better to plan when rates are low or nearing the bottom of the current interest rate cycle. As too many people start trying to plan when finances get uncomfortable, and interest rates are higher.

The first question you need to ask yourself is how much am I able to pay off the loan per year? Be realistic with this, if you can afford another $200 per week and you are paying off $5,000 per year already, allow yourself $15,000-20,000 per year. The next step is to take the remaining debt you are unable to pay off and secure that over the mid-term. If you owe around $400,000 and you are looking at a 3 year fixed rate, you could split the loan $340,000 3 year fixed and $60,000 variable, or 5 year fixed at $300,000 and $100,000 variable.

It may sound simple enough, but what does this really do for you?

For one it gives you certainty on the majority of your borrowings, you will be able to better budget and account for your expenses over the fixed period. Secondly it gives you protection against increasing rates, you will still have a variable portion of your loan, but this is limited and hopefully rapidly diminishing over the fixed period, limiting your exposure to interest rate movement.

Even though we cannot predict the future, you can be assured that low interest rates will not be around forever, please contact us to assist you in making a plan for your future?

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Interest rates – What goes down must come up.

Written by David Evans on April 7, 2014. Posted in Uncategorized

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.

http://www.theguardian.com/business/grogonomics/2014/apr/03/reserve-bank-playing-waiting-game-with-interest-rates

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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