PART 1 - The Scenario.
Have you ever wondered how some people seem to get ahead to pay their home loan down whilst others struggle from pay to pay and yet both generally have similar incomes?
I see this a lot and then I am privileged to be able to drill down deeper into our clients financial lives to see how they operate and find areas we can create efficiency in their finances. This may be the last thing you may want to do but I just love it because I know what this means to our clients to get on top of things..... It gives them the freedom to choose how to live their lives and what to do rather than being held back by a constant lack of money.
The Typical Scenario
I would like to take you through a typical scenario - As an example lets say John and Jenny have the following scenario:
- A $400,000 home loan at an interest rate of 4.45% with 27 years left on the current loan term. Repayments with this home loan are currently $1,043 per fortnight.
- In addition to this home loan they have a $20,000 car loan with an interest rate of 7.5% and fortnightly repayments of $184 per fortnight. This loan has 5 years left to pay this loan down to $0.
- Currently their pay is deposited into a bank account with a balance of $5,000 currently, this account is used for all household bills and earnings a little bit of interest and is with a bank other than where the current home loan is.
This represents a fairly standard client scenario with the household income often equalling the household costs (including discretionary spending and those bills you just do not know what they are for) as most of us mere mortals spend what we earn without some form of control or indicator to let us know to stop spending in place. How to keep your household spending under control is a subject for another time.
"Ultimately the goal is to pay down all loans as soon as possible whilst allowing you to continue to live your life."
The idea is to increase the efficiency of the operation of all finances so the clients minimise the interest, fees and charges they pay the banks above the funds they owe. Ultimately the goal is to pay out all loans as soon as possible whilst allowing them to continue living their busy life and spend after tax money on things that really matter.
About Home Loans:
Although interest rate is not the only consideration in getting a home loan, if a client can save say $3,000 of interest cost per year they can reinvest these saved dollars back into the loan and pay the loan of years sooner.
What is the right bank choice?
There are literary hundreds of loan products to choose from with a range of features, fees and charges. Usually the correct loan comes down to two key items, the one that has the functional requirements of a client and also is the cheapest overall. Paying for extra features that are not being used is a waste of money so the right loan can be different for each client.
As an example three typical options offered to John and Jenny might be:
Bank A - Second Tier bank on their professionals package with an annual fee of $395 per year and package discounted interest rate at 3.85%, excellent package with 10 offset accounts available, credit card included in package and a very good ATM network. This option has not rebate offered to refinance however so costs to move will need to be factored in.
Bank B - a No frills basic home loan with a non-major bank, no annual, ongoing or setup fees. An interest rate of 3.94% and this product being no frills does not have an offset account or any package benefits.
Bank C - Professionals package with an annual fee of $395 per year and a packaged discounted rate at 4.04% with a major top four bank. This is an excellent package with 10 offset accounts available, credit card included in package and a very good ATM network. This option does have a refinance rebate under a special pricing approval of $1,250 to account for costs to move from the current bank. (actual costs are expected to be around $700 for John and Jenny so this rebate would put them in front).
So this is the Scenario, next is the solution.
Need help or have any questions?
Contact Us any time or visit Focus Property Wealth Website or call Glenn directly on 0433 212 444
About the Author - Glenn Biggins is the founder and director of Focus Property Wealth, a finance and property investment advisory firm with a focus on their clients goals and objectives. Glenn is an active property investor himself and has been investing in property through a number of property cycles; he currently owns a portfolio of properties throughout Perth as well as in other states in Australia.
Disclaimer
The advice provided is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice. This needs to have regards to your own objectives, financial situation and needs. Where quoted, past performance is not indicative of future performance.