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How to Pay Off Your Mortgage Faster

Mortgage

Paying off your mortgage faster can help you to achieve financial security years ahead of time. Here are three simple strategies you can use to pay off your home sooner and become debt-free.

1. Halve your monthly repayments and make them fortnightly instead

If you are currently making monthly repayments on your home loan, switching to fortnightly can help you to afford to make an extra repayment each year. This is best demonstrated by using an example.

Example 1

According to the latest figures from the Australian Bureau of Statistics, the average Australian mortgage is $384,700. If you were paying off that amount over a standard 25-year home loan term at an interest rate of 3%, your monthly repayments would be $1,824. You would hence make 12 monthly repayments each year (a total of $21,888).

However, if you divided your monthly repayment by two and paid $912 per fortnight instead, you would pay 26 fortnightly repayments per year which is a total of $23,712 per year. This equates to an extra monthly repayment of $1,814 per year (i.e. $23,712 less $21,288).

The reason to explain the extra amount is that there are 26 fortnights per year compared to 12 months. There are also slightly more than 2 fortnights in every month of the year except February. Thus, over the course of the year, paying fortnightly adds up to an extra month’s worth of repayments.

If these $912 fortnightly repayments were made on the $384,700 mortgage instead of monthly repayments of $1824, the loan would be paid off in 22 years and 3 months instead of 25. In other words, you would pay off your home 2 years and 9 months earlier. You would also save $22,845 in interest.

2. Take out a mortgage offset facility 

A mortgage offset facility allows you to offset any interest you earn on another account from your home loan.

Example 2

If you owe $300,000 on your home loan and you have $20,000 in an offset account for emergencies or other expenses, you will only be charged home loan interest on $280,000 (i.e. $300,000 less $20,000), rather than the full $300,000 that you owe on your home loan.

3. Refinance to a loan with a lower interest rate

It’s important to understand that even a small difference in home loan interest rates can make a big difference to how long it will take to repay your home loan. Again, this concept is best explained using an example.

Example 3

Let’s assume that you owe the average Australian mortgage amount of $384,700 and that your home loan provider is charging you an interest rate of 4% instead of the 3% that was charged in Example 1 earlier in this article.

If you were being charged 4%, your fortnightly home loan repayments over 25 years would be $1,015.50.

However, if you refinanced to a home loan at a 3% interest rate and continued to pay the same $1,015.50 fortnightly amount, you would pay off your home in 19 years and 3 months instead. In other words, you would pay off your home 5 years and 9 months sooner simply by refinancing. You wouldn’t need to make any extra repayments to pay off your home loan faster.

It’s important to understand that there is usually a cost to refinancing. However, if the benefits outweigh the costs, then refinancing is a worthwhile financial decision. You should consider refinancing your home loan whenever your individual financial circumstances or market conditions change. Interest rates in Australia are currently at record lows and it may be an ideal time to re-evaluate your finances if your employment has been affected by the COVID-19 pandemic.

 

Article Source: www.urban.com.au

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Finance

RBA holds rates at August meeting, experts call for stamp duty changes

RBA

The RBA has held interest rates at a record low 0.1 per cent at its August meeting.

RBA Governor Philip Lowe’s comments on the housing market were much the same, noting all markets continuing to strengthen, with prices rising in all major markets.

He did cite an increase in borrowing by investors, and that given the environment of rising housing prices and low interest rates, the Bank is monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.

The experts and economists surveyed in Finder.com.au’s RBA Cash Rate Survey all called the cash rate hold, with 75 per cent predicting the increase won’t happen until 2023.

Tony Makin of Griffith University was the lone expert predicting the rate to rise before 2022.

“In coming months a clearer picture will emerge of underlying inflation trends both in the US and [in Australia]. The recent US inflation spike is unlikely to be temporary given the massive money supply increase, recovery from the pandemic, and substantial US fiscal expansion.”

AMP Capital’s Shane Oliver said the RBA is still a long way from meeting its conditions for a rate hike – namely inflation sustainably back in the 2–3% target range which will require full employment and wages growth sustainably above 3%. And the latest coronavirus outbreaks and lockdowns risk delaying progress towards its goals.

Over a third of experts (71%), called for a change in stamp duty.

They agree that changes need to be made to either stamp duty or government stimulus in order to help buyers enter the property market.

Just over half (54%) think that only stamp duty should be changed, while another third (29%) think neither should be changed.

Finder’s insights manager Graham Cooke said an easing of stamp duty could reduce the burden for first time buyers and establish a more even playing field.

“Stamp duty is essentially a tax that slows down the turnover of property. It discourages current homeowners from downsizing, which locks up some of the market. “A long-term land tax would provide a fairer long-term solution, while adding liquidity to the housing market,” Cooke said.

 

Article Source: www.urban.com.au

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Finance

Lockdowns more detrimental to buyers than hikes in fixed interest rates: mortgage brokers

lockdowns

Mortgage brokers say that lockdowns are far more detrimental to prospective homeowners looking to take out home loans than any potential fixed-rate hikes.

Some banks have already begun raising their fixed interest rates despite the Reserve Bank of Australia holding the cash rate at 0.1 per cent at its July board meeting, saying its central scenario was to keep it there until 2024.

But that rate increase will make no difference to buyers’ borrowing power if their pre-approval has since expired or they are looking to take out a home loan now, experts say.

Instead, the lockdowns have had far more wide-reaching impacts on affected buyers shopping around for a home loan, with some delaying plans for months and others shelving their plans altogether as more than half of the country’s population faces some restrictions across three states.

In NSW, Sydney entered its fifth week of stay-at-home orders, which has shut down a range of industries, including construction and retail, and has placed five entire local government areas into stricter conditions, banning residents from leaving for any work unless they are in essential services.

This has stopped many hopeful home owners from taking out a loan, said Rob Lees, Mortgage Choice Blaxland, Penrith and Glenmore Park principal.

“There is no doubt that for people in affected industries, they will not be able to get a loan. There is no way a bank will give a loan to a tradie if they’re not working during a lockdown,” Mr Lees said.

While banks have not changed policies, as they did last year, Mr Lees said, they do still ask for more information than usual, including whether applicants have been impacted by COVID-19.

Since the latest outbreak, he has placed several applications on hold until trades – from plumbers to beauticians – return to normal.

Fixed-rate increases were almost a “non-issue” as banks were assessing buyers’ borrowing power against the variable rate plus an extra 2.5 per cent as the serviceability buffer, he said.

Victoria’s snap lockdown – the fifth one for the state – is adding to the pent up demand for many house hunters who have put their plans on ice for months now due to the ongoing uncertainty.

Foster Ramsay Finance principal and mortgage broker Chris Foster-Ramsay said applicants need an uninterrupted six-week run of earning income to be able to apply for a home loan.

“There’s a whole lot of people who have sat on their hands in Melbourne for up to six months, if not more. Their plans are on hold, and that is very common down here,” said Mr Foster-Ramsay, adding that it was a responsible lending requirement since the Royal Commission into the financial sector.

“It’s not hard to find those [hopeful home owners] in affected industries – travel, hospitality, live performance – where they are doing whatever they can do to survive.”

But some banks are more understanding when it comes to some industries compared with others, according to Melbourne-based mortgage broker and Pearse Financial director Tom Pearse.

White-collar workers in accounting or legal industries were better placed to have a home loan application approved if employers were willing to write a letter outlining the length of reduced hours due to COVID-19, he said.

Meanwhile, in Queensland, the state has been barely affected by lockdowns, leaving most buyers with the same borrowing power even if fixed rates have increased since they began their house hunting months ago.

“The reason it doesn’t impact borrowing capacity as much is that the banks assess it on the ongoing variable rate, most of the time. It’s not assessed on the fixed-rate itself,” said Caroline Jean-Baptiste, Mortgage Choice Fortitude Valley mortgage broker.

She said the bigger impact for Brisbanites was that some banks were changing their assessment on expenditure around health insurance and private school fees.

“That had more of an impact than a rate change. Somebody, who a month ago could have borrowed $650,000 can now borrow $550,000 if they’re sending their children to a private school or have private health costs,” she said, adding that it was postcode-related.

“So, some lenders use a postcode to determine the benchmark living expenses that they will apply to a certain application.”

 

Article Source: www.domain.com.au

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Finance

How to calculate total return on an investment property

investment property

I am aged 56. My salary is $100,000 a year and I have a $400,000 mortgage on my home. I purchased a three-bedroom investment property in a regional area for $130,000 in 2008. My deposit was $30,000. The rent is $200 per week, expenses $7400 annually, so the property is about $3000 positively geared per year. How do I calculate the return on an investment property? Is it the profit from my initial deposit $3000/$30,000 x 100 = 10 per cent? Or is it the gross return $10,000/$130,000 = 8 per cent? The property over that time has gone up in value to about $280,000 and my mortgage has reduced to some $70,000. How can I, and should I, allocate the capital appreciation in the return, and then should I be factoring in the capital gains tax that I would pay if I sold the property? D.C.

British economist Ronald H. Coase once said you can play around with numbers and, if sufficiently tortured, will confess to anything.

The usual figures presented to a purchaser are a “gross yield” i.e. total income on total value, or $10,400/$280,000 = 3.7 per cent, or a net yield after expenses or $3000/$280,000 = 1.1 per cent, which indicates just how overpriced property is today.

However, a purchaser would only be presented with necessary expenses e.g. council rates, strata levy, etc. You, as an investor, would be interested in your net return on equity or capital. The latter is the sum of your original $30,000 plus an additional $30,000 that you paid off from the mortgage, plus, say, $4550 stamp duty, less CGT, plus any other capital costs for which you have not claimed a deduction against annual income over the years, which we will assume is zero.

To calculate CGT, half of your $150,000 profit would be added to your taxable income and, since you are in the 34.5 per cent tax bracket, extra tax would come to about $28,350.

Most people would say “I bought for $130,000 and sold for $280,000 for a 115 per cent return, or 6.1 per cent a year compound over 13 years,” which is how the Australian Taxation Office would see it.

However you, as an investor, should say, “I’ve put $64,550 of my capital into the house and am walking away with $280,000, less a $70,000 mortgage and $28,350 CGT for a cash profit of $117,100, which is an 81 per cent return, or 4.7 per cent a year compound”.

It’s still not the whole story as it doesn’t take into account your net income gain (or, more commonly, net loss) over the years.

I am aged 68 and on long-service leave at half pay until early January, when I intend to retire. I will be 70 in December, 2022, and have $360,000 in superannuation. My wife is aged 61, earning $90,000 a year and will work for another 1-2 years, when her Public Sector Superannuation Scheme defined-benefit pension will be about $43,000-$45,000 a year, plus a lump sum of $30,000. We have a mortgage of $220,000 at 2.35 per cent interest on our home, valued at $1.75 million. I expect to inherit $200,000 in cash, plus a share portfolio valued at about $360,000. Is it best to put the inheritance into our mortgage, or into my super before January to purchase a pension or other annuity? Also, will any pension I might receive be affected by my wife’s PSS pension? R.P. 

If you accept that a prime goal is to retire with a debt-free home, then your inheritance is a timely boon. So, put the cash into the mortgage and decide whether you want to keep the entire share portfolio, or sell some $20,000 worth and pay off the mortgage completely.

You will probably be eligible for a part age pension (its tests would ignore the family home and any remaining mortgage) when your wife retires, which would result in a drop in family income and a likely fall in expenditure.

The age pension granted would count your combined assets and income and so, yes, your wife’s pension would reduce your married pension, but her PSS pension would be the basis of your retirement income and you will be grateful for it.

The completion of my late sister’s estate is expected soon and our inheritance is expected to be $450,000-$500,000. I am aged 83 and my wife is 82. Downsizing in the future is not out of the question, possibly into a retirement village, with the costs unknown. I expect our monthly pension payment to be affected and would appreciate any suggestions you may make for a safe investment of this inheritance to minimise the loss of the pension. D.D.

It is hard to say without knowing whether you have half a million dollars in other assets, or none. Assuming the latter, then the question is “How is your health? Can you see yourselves spending another decade in your home before downsizing? Or perhaps a year or two?”

Again, assuming the latter, you cannot afford to take the chance of placing the money into a diversified managed fund, especially at the high valuations now being seen in the stockmarket and the historically low interest rates, plus the uncertainty of whether higher inflation is likely coming and here to stay. That would normally require a 3-5 year time horizon.

ME Bank has a savings account offering 0.8 per cent interest for 12 months. That is one of the best rates being offered by a large regional bank.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

 

Article Source: www.brisbanetimes.com.au

 

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