PART 2 - The Solution
We will provide the solution to really turbocharge our clients plans to find home loan savings to pay their home loan off years faster. Previously we laid out a common client scenario.
The Solution....
To save John and Jenny they have decided to take the following action, each of these items will accumulate to reduce their home loan term without any additional repayments to the amount they are currently paying. Just like magic.
- Refinance - to a new loan at a much lower interest rate - new loan will be at $420,000 on Bank option A, current repayments at $1,043 is used to determine the loan term along with item 2 below.
- Consolidated car loan into refinanced loan - The $20,000 car loan is consolidated into the new home loan which will be at $420,000. It is important to not when consolidating a short time loan such as a car loan, if you were to pay that small loan over the longer term of a home loan then you will end up paying thousands more in interest. In this case the same repayments as the current car loan of $184 per fortnight will be paid into the consolidated home loan.
- Offset all savings - all current savings will be moved into the newly setup offset accounts as they can have multiple offset accounts they can have a number setup for various household / living costs. As all accounts are 100% offsets accounts all funds save interest on the home loan so $5,000 will save around $192.50 per year. Granted this is not a huge amount but combined with the other items and interest saved over the term of the loan it all adds up.
- Setup budgeting / accounts - This initially does not sound to exciting and many will want to switch off right now but this is the most important item. Some form of budget only serves to give you an overall snapshot on where your hard earned after tax income is going and like the interest rate slipping up to a higher rate over time there will be money leaving your accounts for things you had no idea you were paying for and probable do not need. Once you have an idea on the various areas you can setup a separate account for key items, if there is a item that perhaps you are prone to overspend on you would create a separate offset account for this and transfer your allocated amount in each fortnight / month. When that account hits $0 (or an allocate balance) you know your blown your budget. All this is designed to do is to help you put the brakes on pr readjust your budget. I will write a more comprehensive article on the account setup in a subsequent article however the government Money Smart website is a great starting point.
- Set long time-frame goals - These are the realistic goals you hope to achieve that can be linked to something you want to do in your life, each goal should have a a dollar and date linked to it because doing stuff costs money right. Write each goal down and setup smaller targets and dates to get you there. Goals are fun because they are real and when you work towards and reach those goals, well that's what is all about. More on goal setting another time.
The Numbers.
So how did we go, Jenny and John are currently paying $1,043 per fortnight on the current $400,000 home loan and $184 per fortnight on the current 20k car loan. The new home loan is $420,000 at an interest rate of 3.85%, so we are going to set this $420,000 loan up with repayments of $1,113 per fortnight (ie $929 + $184).
This new loan term will be 20 years with the exact same repayments as before the refinance and consolidation. In addition to this the interest saving over the loan term is around $42,500, not bad right. This repayment amount and loan term could be adjusted to meet the clients cash-flow requirements depending on their budget and level of comfort in paying the home loan down, however the ideal outcome would be to increase the regular repayments slightly. As an example they could easily reduce the loan term to just 15 years by paying $328 per fortnight more than their current level of repayments (saving almost $100,000 in interest cost over the term of the loan.)
"This new loan term will be 20 years with the exact same repayments as before the refinance and consolidation. In addition to this the interest saving over the loan term is around $42,500, not bad right. "
The refinance process takes around 3 weeks to settlement. When the new home loan is settled we can setup the offset accounts as these will save further interest with every dollar in each offset saving the day it is deposited into your account.
The combinations of these and a continuous check that everything is humming along will get you, like Jenny and John, on the road to being in total control of your money.
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.