Our home loan strategy will be influenced by where we are in our Financial Life Cycle Journey. If you are a First Home Buyer, then frequently the focus will be on “getting on top of the mortgage” as our parents and friends may say. Whereas, as an investment property buyer the type of home loan you use will depend on your financial strategy.
Outlined below in alphabetical order are some home loan strategies.
Aspire allows you to simultaneously invest while you pay down your home loan. Each month some of the principal component is invested in an S&P/ASX 300 index fund and/or international equities index fund.
A major benefit of Aspire> is that you start investing from your first repayment, and it may be used as complementary strategy to Interest Offset and Equity Release depending on the lender. Aspire is good for those people who are not disciplined and recognise that wealth creation is a long term strategy.
Key Tip: A sound wealth creation strategy involves asset diversification and with Aspire you get both your property and equities through a managed fund.
Many of us decide that rather than using the equity in your property to buy another property, as described in Equity Release, but prefer to Cash Out. This is where the equity is released, but in the form of cash. This money can then be used to invest in more property, shares, commodities and other forms of investments. This strategy may take a few years to enact as you must first build equity in your property, and this is dependent on property prices increasing.
Key Tip: if you can cash out, and then use the cash as deposit on an investment property this is a better way to go than an equity release, because frequently the bank will cross collateralise your properties as security under the Equity Release approach.
This strategy is to use any equity built up from an increase in your property value, and/or if you have paid off more than your minimum amount each month. Many people use the equity in their home as a deposit to buy an investment property.
A major benefit of Equity Release is that it gives you a springboard into accumulating some significant assets. As with the Cash Out approach, this home loan management strategy requires you to have equity in your property. This could take a few years while property prices increase.
Key Tip: be careful not to end up continually drawing on equity in your properties, so that you find that you end up with lots of debt and very little in terms of net assets.
This home loan strategy involves putting all your salary and other income into an account. The balance of this account at the end of each month is “offset” against your home loan balance, so that you end up paying a lower interest amount.
This home loan management strategy may be used with Aspire to maximise your benefits.
Key Tip: You must be disciplined if you are to adopt this strategy and get the benefits.
You can write a book on comparing which is the best home loan strategy - Interest Only or Principal & Interest. If having flexibility is a priority and knowing that you can easily make the interest payments each month, then Interest Only may suit you best. Particularly, if you have a lumpy income stream. Whereas, if you like the certainty of paying down your home loan, then Principal & interest combined with a Professional package may suit you best.
Key Tip: Calculate the difference between the repayments and determine what investment return you can get if you invested the difference.
Having more than one loan account can be useful in managing your home loan and financial plan. One sub-account can be used for funding your investment property, another to buy shares and they could be fixed, variable, Interest Only or Principal & Interest.
Key Tip: DFor tax reasons, if you split ensure that you keep the purpose of your sub-accounts clearly defined. Make sure the income relating to the sub-account is applied to that account.
A simple strategy used is to pay weekly or fortnightly rather than monthly. This reduces your outstanding home loan balance faster, and therefore you are paying more principal off each month. Lump sum payments, e.g. if you inherit some money is another way of paying off your home loan quickly.
Key Tip: This is a simple and easy solution to implement, however it is important to have a long term financial plan that reflects both your current and future life style.
The question of whether to fix is a question we are often asked. The answer depends on where you think interest rates are going? A good indicator is the yield curve and look to see what the banks are doing. Specifically, they are usually a head of the market in anticipating falls or increases in fixed rates
There are many products available that given you the benefit of lump summing against a fixed rate home loan.
Key Tip: Look at our article on the yield curve, as this is an indicator of where rates are going.
For free advice, to answer any questions or to arrange an appointment, complete the Contact form above or call us now on 02 9233 1111.
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