In this current climate of low interest rates, I wanted to share with you 5 great tips to maximise the impact of these low rates on the finance structures that support your portfolio.
1. Complete a full review of your current facilities
In a low interest rate environment with the prospect of further rate reductions, people tend to be complacent.
They think they’re on the best deal.
Only recently, I was talking to a Medical Professional who has quite a substantial property portfolio, and he thought that his current rate of 4.8% was as good a deal as he could expect to find in the market.
When I told him he was probably about half a percent out of the market and the resulting impact on his portfolio of approximately $3 million dollars meant that he was missing savings of around $15,000 a year he realised that he needed to review his facilities and consider a change.
For smaller valued portfolios the savings will obviously be less but even a saving of $100 a month could be the difference between you either starting or adding a new investment property to your portfolio so please undertake a review.
The banks are actively competing for your business and now is a great time to recast your financial structures – be it for accessing investment funds or reducing your monthly exposure.
2. Gear your repayments now as if rates were higher
If possible, you should gear your repayments schedule at an assumed higher home loan rate.
To illustrate, using today’s market rates of anything between 4.5% and 4.7%, this would mean gearing your repayments at assumed rates of 6%, 7% or even 8%.
Rates aren’t going to stay this low forever and if you can afford to, higher repayments can help to either build a buffer or reduce your home loan liability and in turn build your equity.
For example, if you currently have a $400,000 home loan at 4.75% you should be paying about $2,100 a month or $480 a week.
If you “set” your repayments at a higher rate, such as 6% these repayments would be around $2,400 a month or $550 a week.
The impact of paying this additional amount of $70 per week is significant.
By re-gearing your payments at 6% and paying $550 a week instead of the standard $480 a week, you are going to save over $94,000 and 7.1 years on this $400,000 loan.
Now that’s a significant amount.
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3. Create an offset account
Consider setting up an offset account.
Offset accounts basically sit “beside” your mortgage so that any savings inside these accounts is included as a credit against your loan which in turn reduces the amount of interest you pay.
The example below shows the impact of an offset account of $10,000 sitting against a mortgage of $410,000 across the life of the loan.
Paying interest only on the differential saves you over $30,00 in interest and over a year of the loan term
The bottom line is that, if you don’t have an offset account, you need to get one!
4. Don't take on bad debt
The next tip is to try as hard as possible to avoid taking on bad debt.
By that I mean debt taken on for expenditure on assets or activities that don’t generate wealth...like a new car, a boat or a lavish overseas holiday.
Try and use existing cash for these - avoid taking on a personal loan, a high interest vehicle finance package or high credit card debt.
In fact, if you can, take the opportunity now to remove any of these style of debts you have.
With a little bit of discipline now you’ll be able to buy those things in the future by getting ahead on your home loan.
5. Consider fixed rate options
The final tip is to start thinking about your fixed rate options.
Especially if you have a significant property portfolio.
It's important to note that, whilst rates are at an all time low, there may opportunities to fix your loans for both 3 and 5 year periods at well under 5%.
Obviously there are individual circumstances to consider however everyone should be starting to at least explore their options and put a plan in place to look at establishing at least a portion of their loans at fixed rates.
