More prosperity Is Fixing The Answer? W ith three interest rate rises in 2006, some borrowers are looking and the economy, it is impossible to predict where interest rates will go. By fixing your nervously at their increasing mortgage repayments and asking interest rate you could therefore be locking – is fixing the interest rate a good idea? into a rate higher than the average variable rate over the period that you’ve fixed for. More recently, though, some lenders are For this reason, many borrowers choose to making their fixed rate products more flexible. For example, in the past few years we’ve seen fix for less than three years. Then, if variable the expansion of split or combination loans. rates do fall, they are only locked in to paying This is where a proportion of the loan is fixed, a higher rate for a fairly short period. whilst the remainder is left as variable. Split Loans Benefits Another way to “hedge your bets” is to The main benefit of a fixed rate home loan consider a split or combination loan. This is certainty – the amount of the regular product allows you to have a fixed interest rate repayment will not vary for the period that the for a proportion of the amount borrowed, and loan is fixed. For some people this is extremely a variable rate for the rest. The split between Traditionally, Australians have always favoured important, and acts as an insurance policy or the two is decided at the outset of the loan. the variable rate home loan. It was reported hedging against further variable rate increases. Typically these splits are 50% to 70% fixed, recently that some 80% of all home loans carry with the remainder left as variable. a variable interest rate. For example, first home buyers or couples starting a family tend to be on a tight budget. The benefit of this type of loan is that you Whenever variable interest rates increase, Knowing that the repayments won’t go up for get some of the advantages of each type of however, borrowers understandably review the next few years can provide peace of mind. loan. You can have the flexible features of a their options. Therefore there is a trend variable rate loan and enjoy the lower cost towards fixed rate home loans, with some Also, people may be concerned about when interest rates fall, whilst still fixing the lenders reporting up to 25% of new loans potential changes to their job or income interest rate on part of the loan as a hedge being either a fixed or split loan. level, and so would welcome the certainty against increasing interest rates. of the repayment amount. Features of a Fixed Loan Similarly, property investors may also Wide Variations The most obvious feature is that the interest be seeking certainty on the costs of their There are well over 100 fixed rate products on rate is fixed for a set period, typically between investment. By locking in the interest rate the market and, as you’d expect, wide variations one and five years. At the end of this period and having a fixed rental amount coming in in interest rates and features. For example, on the loan will normally revert to the standard from the property means that much of the a three year fixed rate home loan the interest variable rate product of the lender, although cash flow is predictable. rate “spread” is over 1%, which can make a you can usually renegotiate a further term at significant difference to the repayments. Also the interest rates in force at that time. For some, they may believe that variable the range and flexibility of the loan features, rates will continue to increase in the future, and the size of the exit costs, vary greatly. Traditionally fixed rate loans have had and so are prepared to “bet” against this by fewer features than variable rated products. fixing their rate. If you’d like to consider a fixed rate For example, they may not allow for extra or split loan, then we can help you to repayments to be made. Also, to get out of a Future Direction compare the different products available. fixed rate loan before the end of the contract However, unless you are an expert in money Please feel free to get in touch for a period is sometimes very expensive. markets and the future direction of inflation “no cost, no obligation” review. Buying A Property At Auction P roperty auctions are a popular way of selling a home. Whilst some buyers are wary of auctions, with good preparation they can be a great way to purchase a property. The difference between an auction and other ways of purchasing a property is that you are in a “high-pressure, one time only” selling situation which can be very emotional. The key to controlling the emotions and achieving a successful result is preparation. Do Your Homework First It is important to know what similar properties in the same area have been sold for. There are several Property Reporting Services that will sell you a report of recent sales, capital growth history and projections, etc in the same postcode for around $50. Nothing beats first hand research, though. Try to attend a few house inspections in the area, talk to the agents, and get a feel for the market. Attending several property auctions, in your “target area” if possible, will give you more confidence in the auction process and the pressures and emotions you’re likely to experience. Once you’ve identified an actual property that you’re interested in that is being sold at auction, then it’s important to make sure that the property is inspected by reputable building and pest inspectors and any problems are known. Depending on the problems, walking away now might be the most prudent decision – not always easy if you’ve already spent time The Auction Day Remember your maximum price limit. It is and money on looking at the property. easy to get carried away in the heat of the Allow yourself plenty of time to get there, Get your solicitor to review the contract moment, but then regret it afterwards. and arrive early. Take another look around the documentation before the auction. Whilst property and pay particular attention to those If you are successful you will normally be this may cost some hundreds of dollars, you aspects that you have concerns about. Ask any asked to sign the sale contract and pay the could be risking thousands of dollars by not last questions of the agent. holding deposit straightaway, so make sure picking up some issue before purchasing. Look at the information on the auction, the you have the cheque or deposit guarantee rules of the auction, etc. You may be required with you. Remember, there is no cooling-off Get Your Finances Organised to register as a potential buyer, so make sure period when you buy at auction. Make sure that you have your home loan you do so. This gives you the right to bid: it approved before the auction day so that you does not mean you must bid. If bidding does not get above the reserve are 100% confident that you can purchase then the property will be “passed in”. the property. The Auction Itself This means that the property won’t be sold at the auction. The highest bidder (and Also, you will typically need to put down up Remember that the property seller will have sometimes others) will normally be given to 10% deposit on the day. This can be cash set a Reserve Price for the property. Bidding or via a deposit guarantee. The guarantee the opportunity to negotiate separately with will normally start below this figure. Once this means that the purchaser’s own cash won’t the sellers to see if a price can be agreed. figure has been met then the auctioneer will be used at this stage, so helping to manage announce that the property is “on the market”, At the end of the day, remember that cash-flow in the short term. meaning that it will definitely be sold. you’re making one of the biggest financial Prior to attending the auction you should Bidding is normally made in similar decisions of your life. By preparing determine what your maximum price limit is. increments to the previous bids (e.g. $5,000 properly, investing a little money upfront This will be based on what you can afford, and a time). You will be assumed to bid higher with the legal and inspection experts, and how much you have been approved to borrow by that same amount unless you specifically keeping a cool head on the day, then you’ll from your lender. state otherwise at the time you make the bid. end up with the right result. Consolidate To Get Ahead D ebt consolidation is often portrayed as a way out of trouble. But for many it’s actually a smart way to get debt-free more quickly by reducing the interest being paid. Many of us have several loans and debts. A good example is to watch out for low Similarly, by refinancing a car loan of For example we may have a home loan, a interest or even interest-free balance transfers $25,000 at 12.75% you could see interest line of credit, car financing, a personal loan, that are regularly offered by credit card savings of approximately $1,200 per annum. a few credit cards, and some store finance for providers. You can apply for a new card and Of course in both of these examples the furniture or renovations. These commitments then transfer the balances from other credit amount of saving would reduce over time as will all be charged at different interest rates, cards, which will then be charged interest at a some of the debt principal is paid off, but it perhaps with account fees and other charges. very low rate or even interest free, at least for would still be substantial. Whilst it may have been logical to set-up a period of six months and occasionally for the lifetime of the balance transferred. Now here is the important point. By keeping and keep these commitments separate, it can the new consolidated payment the same as mean that you are paying more interest than This can be a good short term solution, but the sum of the various payments being made you have to. often the interest rate then reverts back to a previously, then the debt will reduce much Credit Cards (comparatively) high rate. So then the whole quicker as less interest is being paid. process of application and balance transfer For example, the Australian Consumers’ has to start again. Also, this doesn’t help Words of Caution Association monitors 250 credit cards on to reduce the interest rates on some store This strategy does work, but you should a weekly basis. They currently list cards finance, personal loans and car financing. watch out for the following: with interest rates varying from 8.99% to • Cancel The Old Debts or Cards. If you 18.99%, with annual fees ranging from $0 to $395, and interest-free days from nil to 55. “It’s a good way of reducing transfer the debts (e.g. from credit cards) then Whilst some of the more expensive cards interest and clearing you are at risk of building up new debt in its place, which isn’t the idea. By cancelling the will have rewards and loyalty programs, these may not make up for the differences in debts more quickly.” old credit cards and loans this won’t happen. • Early Repayment Costs. Some loans may interest charges, fees and interest-free days. incur a penalty if paid out early, which can Smart Debt Consolidation Personal loans, car loans and store finance negate some of the benefit of refinancing also show wide variations, with some very A more comprehensive solution is to the debt. high interest rates. For example, interest- consolidate all of the debts into a relatively • Establishment Costs. Organising a top free finance through a store is an attractive low-interest product such as a home loan. up on your home loan, or refinancing option provided that the debt is cleared This can be done by either using an existing altogether, will incur some costs. Again within the term. If not, these loans often capacity, for example using available redraw you should check what these costs are and revert to extremely high interest rates – or an unused line of credit, or by refinancing factor them into your calculations. 20% and higher are not uncommon. the entire home loan. This can often result in halving your average Conclusion Balance Transfers interest rates. For example you could refinance If used correctly and by keeping the new The smart way to reduce this debt more a credit card at 18.75% to a standard variable payment at the same level as the sum of the quickly is to minimise the interest rate and mortgage rate of under 8%. On a debt of old payments, then using your home loan to fees being charged, whilst maintaining the $10,000 this represents a reduction in interest consolidate your debts is a good way of reducing same monthly payment as before. of nearly $1,100 per annum. interest and clearing debts more quickly. A Message From Us Five Years Off For Good Behaviour! W ith the recent rises in interest rates, many of us will focus our attention on reducing our home loans. This article looks at how to take five years off the life of your loan. There’s nothing like an interest rate rise to grab our attention. It makes us all think about how to reduce our biggest debt – the home loan – as quickly as possible. Whilst there are a multitude of products, Shirley Ferris formulas and complex ways of structuring your finances to reduce the debt, there At Foster & Blanchard Finance we are also the timeless, proven and simple are committed to delivering to you the methods of achieving big reductions on your best finance solutions based on your home loan. Here’s a few of them. own personal circumstances. It is this fundamental approach that separates “Save five years and up to Allow For A Higher Rate us from your local bank. We go further We all know that interest rates move up and by providing a “personalised” service to ensure our clients’ ongoing financial down. One way to allow for this fluctuation $72,000 in interest charges.” needs and goals are catered to. is to calculate the repayment at 1% higher than you’re currently paying. This gives you there are 26 fortnights in a year, which means The greatest compliment a business two benefits: you’re making the equivalent of 13 monthly can receive is a referral from an existing payments each year. client. Should you know someone 1. Certainty. You know that you can absorb a series of rate increases without having to Taking our example the minimum monthly who would benefit from our services, increase your repayments. repayment, divided by two, becomes $893 including a free subscription to this (about $70 more than the minimum fortnightly newsletter, please contact this office. 2. The “Gap” between the rate being charged repayment would be). Paying this amount Warmest regards, and the rate you’ve decided to pay is all would save five years off the term of the loan. additional payments, reducing the interest and the life of your loan. Lump Sum Repayments As an example let’s take a 25 year $230,000 To save five years off the loan term you’d mortgage at 8.07%, which is the average need to pay in a lump sum of $18,000 at Shirley Ferris standard variable rate of the big banks. the beginning of the loan. Your minimum monthly repayment would Whilst this may not be practical, smaller be $1,785. An extra 1% interest rate “buffer” lump sums (eg a bonus from our employer maintained over the life of the loan would or a refund from the tax office) paid in on mean you’re paying an extra $150 per a regular basis will have a similar effect. month. This would save five years off the loan term and $72,000 in interest. Taking our example again, paying a lump Shirley Ferris, sum of $3,000 into your home loan each If paying an extra $150 per month is hard year for the first eight years would achieve Director, Principal Mortgage Consultant to do straightaway, try increasing the the five year reduction. Foster & Blanchard Finance repayments in small amounts over several months, for example by adding an extra $25 Putting a lump sum into your home loan rather 220 St Vincent Street each month for the following six months. than an investment (eg shares) can be a better Port Adelaide SA 5015 financial decision. For example, take someone Mob: 0408 821 119 More Frequent Payments paying 40% income tax plus 1.5% Medicare This is simply another way of making levy with an average variable rate home loan. Fax: (08) 8241 1633 They would need to get over 13.5% gross extra repayments. E-mail: firstname.lastname@example.org return on an investment in order to make it a Many people pay their home loans monthly, better decision than reducing their home loan but for those who are paid more frequently interest bill. you could make the repayments each fortnight (or even each week). Conclusion Rather than ask the lender to recalculate A home loan is normally our biggest single what the new minimum repayments should financial commitment. By increasing the be, simply divide the monthly figure by repayments by relatively small amounts we two. This will effectively increase your can easily save years off the life of the loan repayments by about 8%. This is because and thousands in interest. DISCLAIMER: This newsletter is provided for general information only. Please do not rely on this newsletter as a substitute for specific legal or financial advice. Before making any decisions you should consider your specific objectives, financial situation and needs.
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