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Home Loan Tips
Be careful of 'honeymoon' intro rates
Home lenders entice borrowers to their home loans
with attractive low introductory rates. These rates
may be up to 2 percentage points below the standard
rates for home loans and look therefore look very attractive.
But Infochoice analysis shows otherwise. "Honeymoon
rates" only last for six months to a year before
automatically reverting to the standard rate offered
by that lender. The 'comparison rate' that lenders must
publish for each loan is a much better tool with which
to compare the true interest and fees costs of different
loans. Infochoice's Australian Mortgage Report in 2004
found that the lower the introductory rate, the more
costly the loan turned out to be over time.
By all means take advantage of these discounted rates
but don't let them dictate your choice of loan. Compare
loans on the basis of their true cost over time and
on the basis of flexibility and features important to
you.
Check if there are ongoing fees
Many banks now charge monthly or annual administration
fees on home loans. When comparing the cost of different
loans, don't just look at the interest rate, look at
the 'total cost of borrowing'.
Many lenders are using 'average annual percentage
rates' (AAPRs) as a means of comparing the true or total
cost of loans. Although this measure incorporates fees
as well as the interest rate, they can be misleading
because an AAPR will vary on a particular loan depending
on the amount borrowed.
View our calculators
& see how much you will save with no monthly or
annual fees.
Use your home equity to borrow
The more you pay off your home loan, the more of the
property you own or the more 'equity' in the property
you build up. With a more flexible banking system these
days, it is possible to borrow against this equity for
further investment; a second property, shares etc. The
advantage of borrowing against this equity rather than
taking out a personal, investment or business loan is
that the interest rate will invariably be lower –
the better the asset you put up as collateral, the better
the terms a lender will offer. Nothing beats bricks
and mortar security (in this case, your home).
View our calculators
& see how much you can save by consolidating your
debts.
Can't get a standard loan? There are alternatives
If the banks, building societies and credit unions
won't lend to you because you're self employed, newly
arrived in the country or have a poor credit history,
consider the booming non-conforming and "low doc"
loan market. A number of non-bank lenders offer loans
which especially cater for this type of borrower. The
interest rates on non-conforming loans are generally
higher but come down after a few years of on-time repayments.
Contact our office
today to compare non-conforming and low doc loans.
Compare loan features, not just rates
The more flexible the loan, the higher interest you'll
pay. A variable loan which allows you to draw against
repayments or offset savings against the mortgage will
have a higher rate than a basic loan. Always compare
loans with the same features when looking for the best
interest rate.
Link > View
our Home Loan Comparision calculator
Additional repayments
Making additional repayments beyond what's required
in your minimum monthly repayment is one of the best
ways to reduce the total interest paid and term of your
loan.
However, make sure that your loan allows you to make
additional repayments without penalty. Fixed-rate and
basic (or 'no-frills' loans) often have restrictions
on extra repayments or charge a fee for the privilege.
Use our calculators
to see how much you can save
Pay your loan off quicker with fortnightly
or weekly repayments
Dividing your minimum monthly repayment into two fortnightly
or four weekly payments can reduce the term of your
loan in two ways:
1. Because there are more than two fortnights or four
weeks in every month, dividing your original monthly
repayment into two or four means you actually pay more
over the course of a calendar month.
2. When interest is calculated daily, the more frequent
repayments result in less interest being charged to
your loan over the course of a month.
But watch out. If requesting fortnightly or weekly
repayments, make sure you specifically ask your lender
to halve or quarter the monthly repayment. Unless you
ask them, many lenders these days will just calculate
the more frequent repayment on the basis of the minimum
required fortnightly or weekly repayment, delivering
very little extra repayment advantage.
View our calculators
to see how much you can save
Make your surplus cash work harder
Use cash savings to help pay off your loan quicker.
Remember the old saying 'a dollar saved is a dollar
earned'? If you have a home loan at 7 per cent, every
extra dollar you pay off the principal is another dollar
you are not paying 7 per cent on each year. If you instead
put that extra dollar into a savings account you are
only going to earn 2 or 3, perhaps 5 per cent at the
most. Therefore putting savings into your loan earns
you twice as much as a savings account.
These days, redraw facilities available on most standard
variable loans allow you to take back those extra payments
if needed anyway.
Save with a line-of-credit loan
Disciplined borrowers can make use of the increasing
range of line-of-credit loans, also called salary account
or all-in-one loans, which offer the chance to make
every spare dollar work to reduce your home loan. These
loans allow your income to be paid directly into the
loan account to reduce the loan outstanding sooner than
waiting for the repayment due date.
You are also effectively making larger repayments because
you only withdraw the money you need to live on each
month, leaving all surplus cash in the loan account
to reduce the balance. In this way, the loan can be
paid off much quicker and thousands in interest saved.
Line-of-credit borrowers must be disciplined, however,
and not withdraw more money over time than is going
in. Income you bank must exceed your total expenses
by at least the value of your principal-and-interest
loan repayment before there is any financial benefit.
Make the most of rate falls
If monthly repayments drop because interest rates
have fallen, try to maintain the old repayment levels.
This means you will pay off more of the principal with
each repayment, reduce the term of your loan and the
total amount of interest paid.
Link > See
how much you can reduce your interest with extra payments
Don't fall foul of the taxman
If you're an investor in rental property, take a note
of these common problem areas the ATO finds with deduction
claims. Legal fees are only deductible if they're associated
with taking out a loan to buy property - not for the
actual purchase. These fees can be claimed along with
other borrowing costs but not in the year of purchase.
They must be depreciated over the life of the loan.
Another deduction scrutinised by the Tax Office is depreciation,
relatively easy to calculate for new properties but
harder for established homes. Investors may try to determine
these on their own but can pay a quantity surveyor to
do it. This usually costs at least $500 but often results
in a higher depreciation claim.
The other area targeted in ATO audits is travel expenses
associated with rental properties. Travel claims are
allowed for the investor to do repairs, collect rent
or carry out inspections. The property does not have
to be interstate. A yearly per-kilometre claim can be
made no matter where the property is.
