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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.

Australian dollars

Western Australia 2015, what’s in store?

After hearing from key people within CBA this morning looks like we have an interesting ride ahead in Western Australia.

There is an expectation that the unemployment rate will get to 6.5% in 2015, as more workers become casualties in the iron ore war and gas workers move out of their construction and into their operational phase. But this increase in unemployment should largely be absorbed by the construction and retail sectors, as building approvals are trending substantially upwards. With an increase in construction activity, the retail sector will also help to ease the unemployment rate as homes are furnished and fitted out upon completion.

East coast workers appear to be leaving with interstate migration showing negative figures currently, but again this has been offset through immigration and natural growth, so there should be an increase in population of around 45,000 for WA in 2015, which should further aid the construction industry and help to support the rental market.

On interest rates, there is a strong view that there will be a further rate cut in March, with a possibility of further cuts in May/ June of this year. The low interest rate environment is expected to continue for the foreseeable future. Here is the ‘BUT’ though, with fixed rates at record lows, the chance to capitalise on this may be limited. There is an expectation as the US economy continues to recover and increases their domestic interest rates, the longer term money markets will become more expensive, and these record low rates will begin to evaporate mid-2015.

So what does this mean for you? There should be decent growth in the sub $800,000 housing market, as home owners are taking advantage of low rates to upgrade the family home. Money is cheap and the trends seem to suggest consumers aren’t afraid to invest that money into bricks and mortar currently. For the $800,000 plus market, growth will be flat for this area in the market, with limited activity and demand. But this gives rise to opportunities in picking these properties up at under market value, as motivated vendors looking to exit the market will need to discount, or accept a below market offer to move their property on.

If you choose to do nothing in terms of building, buying or renovating your current home, but still have a mortgage, be buoyed by the knowledge that with the aggressive pricing from 2nd and 3rd tier lenders, there has never been a better time to take a health check on your current borrowings, to make sure you are making the most of these extraordinary times we are in.

Contact us to find out more or discuss further. 

Michael McKenzie

 The above is based upon opinion of economists, it should not be considered factual. Please undertake your own due diligence and consult the relevant professionals prior to making a decision on your finances and future plans


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