Uncategorized

Refinancing your home loan may seem like a daunting prospect, but doing so could save you thousands on your home loan. Like anything, it doesn’t come without its risks, so check out our pros and cons list to see if it may work for you.

Pros:

Lower interest rate

One of the biggest benefits of refinancing is to take advantage of a lower interest rate. Lowering your interest rate will reduce your monthly repayments, potentially saving you hundreds each month. You could use this money on essential or non-essential items, or continue to pay at the level of your previous repayments and pay off your loan quicker, saving you on interest.

Reduce the length of your loan

Refinancing your home loan means you may have the option to reduce the length of the loan. Keep in mind this will probably increase your monthly repayments, but if you’re in a position to do so, paying your loan off quicker is likely to save you on interest over the life of the loan. For example, you may have a 25-year loan term and wish to reduce the length to 15 years.

Your monthly repayments will increase but you will likely save thousands on interest. Make sure you do the math to see how much you would save on interest to ensure this strategy works for you.

Access your equity

Home equity refers to the difference in what you’ve paid off on your loan and the value of your home. If you have a $600,000 home and have $250,000 left on your loan, then you have $350,000 in equity.

When you refinance your home, your lender may allow you to access some or all of this equity, which you can use however you wish.

It’s commonplace for borrowers to access their equity and use it for things like renovations, a car, or investing. Keep in mind your equity is a powerful tool in negotiating with your lender, and can help you to gain access to a better interest rate. It’s recommended you don’t spend all of your equity in one go.

it’s important to remember that the more equity you have, the better chance you have of getting the very best interest rate you can from your new or existing lender.

Cons:

Fees

It’s important to do your research before you consider refinancing as there can be a number of fees involved. A few of these include exit, valuation fees, application fees, and break fees. It could cost hundreds or even thousands of dollars to switch if you’re not careful.

Lenders Mortgage Insurance

If your equity is less than 20% of the property value, your lender may require you to take out Lenders Mortgage Insurance (LMI) when you switch. This protects the lender if you default on you home loan, but could end up putting you seriously out of pocket.

Your credit score

Most people don’t realise that every application for credit goes into their personal credit file. Refinancing your home loan often could impact your credit score which can make it difficult to receive lower interest rates for future applications.

We all know that recycling is great for the environment. But debt recycling? Well, if done right, that could be great for your own little patch of planet earth.

There are three things that many Aussie property owners wish they could do: make their debt tax deductible, pay off their mortgage sooner, and invest in other asset classes to build towards future wealth.

Well, with debt recycling it’s possible to achieve all three. But it’s a somewhat complicated strategy that’s not without risks.

But first, what exactly is debt recycling?

The idea behind debt recycling is to take the non-deductible debt from your home and recycle it into tax-deductible debt.

That is, to replace your mortgage debt with investment debt.

The earnings accrued from your investments can then be used to pay off your home loan.

If done effectively, not only can you pay off your home loan much faster, you can also generate higher levels of wealth as your home and investments grow in value over the long term.

Who might it suit?

Debt recycling is a higher-level financial strategy that is more suitable for certain individuals including those who:

– Are happy to invest for the long-term (5 years plus), as opposed to seeking immediate

returns.
– Have a high marginal tax rate (greater benefits from tax-deductibility).
– Have a good appetite for risk.
– Have a secure income source that is not affected by investments.

The benefits

When executed properly, debt recycling offers a number of significant benefits, such as:

– Allowing you to start investing almost immediately, even if you have no existing source of finance with which to get started.
– You don’t require years of investment practice to begin debt recycling (although it is highly advisable to work alongside an experienced financial planner).
– It can help you to cover the gap between your superannuation savings and your retirement targets.
– It can help you to pay off your mortgage earlier and relieve your debt burden.

The risks

Though it is true that you can reduce risks by gaining a firm understanding of debt recycling and other investment strategies, you will never be risk-free.

The two major risks you face are:

1. In the same way that you benefit from compounding gains over time, a market downturn can compound losses, meaning that the amount you eventually owe could be more than the value of the portfolio.

2. You could also be at risk of losing your home if you use the existing equity in your home as security for the investment loan.

Is debt recycling right for you?

It’s fair to say that debt recycling isn’t for everyone. Like most things in life, it will depend on your personal circumstances.

So if you’d like to find out more, get in touch. We’d be more than happy to run through your options with you.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Australian homeowners are loading up their offset accounts in record amounts, so much so that the average household is now almost four years ahead on their mortgage payments.

Quick question: do you have an offset account (or several) attached to your mortgage?

They’ve become quite popular in recent years, especially since the RBA’s official cash rate has hit record low levels and impacted the amount of interest you can earn in savings accounts (which we’ll explain in more detail further below).

But first, how much have offset balances increased?

Research from the Australian Prudential Regulation Authority (APRA), provided to The Australian, shows the average balance sitting in offset accounts is now nearly $100,000 – up almost $20,000 since the pandemic kicked off in March 2020.

In total, $222 billion was in offset accounts across the country as of September 2021 – up almost $50 billion from $174 billion in March 2020.

In fact, in the September 2021 quarter alone, offset account balances increased by 10%.

All of this has helped contribute to mortgage holders now being, on average, 45 months ahead on their repayments – up from 32 months prior to the pandemic.

In terms of the various ways Australians have gotten ahead, 57% of prepayments came from offset accounts, 40% via available redraw balances, and 3% through other excess repayments.

So what’s an offset account?

Basically, an offset account is a regular transaction account that is linked to your home loan.

The advantage is that you only pay interest on the difference between the money in the account and the mortgage.

Some banks allow you to have 10 offset accounts attached to your mortgage, too, with cards linked to them that you can use for everyday spending.

How exactly does it work?

Say you owe $350,000 on your mortgage, and have $50,000 in a savings account.

If you move that $50,000 into a full offset account, you’ll only pay interest on $300,000 (which is the loan value minus the amount in your offset account).

The offset account can then continue to be used for all your daily needs, like receiving your salary or withdrawing cash.

So why would you consider an offset account over a savings account?

With the RBA’s cash rate at record low levels, the interest rate you’ll receive on the balance in your bank’s savings account is also at record low levels too.

Say for example that you had a savings account with a 1% interest rate and a mortgage with a 2.2% interest rate.

By allocating money into your full offset account, you’d save more money on interest than you would earn in your savings account.

Additionally, interest on your savings accounts is subject to tax, whereas the interest-saving on your mortgage isn’t.

Is an offset account for you?

Of course, there are additional factors you’ll want to consider, such as account keeping fees and the minimum amount needed in the account to make it useful.

And obviously, savings accounts and offset accounts are not the only two places you can park your hard-earned money. Depending on your risk appetite, there are other options you could consider that might yield a higher return.

The long and the short of it is everyone’s situation is different, but if you think an offset account might be for you, get in touch and we can help you explore your options.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.