Finance strategies: how to be more effective with your loan
Too many investors make the mistake of thinking of their home or investment loan as a one-time solution to fulfilling their financial needs. However, whilst securing a competitive loan with features that suit your situation is the right place to start, there are a number of finance strategies that can help you maximise your opportunities moving forwards.
If your plan is to expand your property portfolio in future, anything you can do to reduce your existing debt and maximise your savings could put you in better position to fund your next property, getting you one step closer to achieving your long-term goals. Here are just a few strategies to consider to be more effective with your current lending solution.
Open an offset account
If the feature is available to you with your current lending solution, opening an offset account is a great way to reduce your interest repayments and pay down your loan more effectively. Typically available with variable home loans, an offset account functions similarly to an everyday bank account in that you can deposit and withdraw money as you wish, but is instead set up against your home or investment loan. The money you deposit into the account is then offset against your loan balance to reduce your repayments or, in the case of principal and interest, pay off the principal of your loan faster. For example, if your mortgage is valued at $400,000 and you have $50,000 saved in an offset account, the $50,000 would be offset against your loan balance, meaning the interest on your loan would only be calculated on $350,000 of the loan amount.
Use a redraw facility
The principal of a redraw facility is similar to that of an offset account in that the facility allows you to make additional repayments on your loan to reduce your balance and therefore the amount of interest owing. However, rather than setting up an account separately, these additional repayments are deposited into the loan account to reduce your loan amount directly. Whilst redraw facilities can be used by investors as a strategy to pay down their loan faster, this feature generally has more limitations when compared to offset accounts. In most cases, redraw facilities will only allow for a limited number of redraws or a minimum amount for redrawing, and a fee is often applied for each withdrawal. In the case of investment loans, there may also be tax implications for investors who withdraw funds from the facility for personal use. However, the feature may be better suited to buyers who want to eliminate the temptation of withdrawing excess funds.
Consider your repayment frequencies
One of the key factors you will need to consider when applying for a loan is the frequency at which you make repayments. Whilst this should first and foremost depend on your cash flow situation and your personal financial needs, if you have the flexibility and capacity to do so, increasing the frequency of your repayments could help you reduce the term and costs of your lending solution. Most lenders will have the option to pay monthly, fortnightly or even weekly installments. By choosing the more frequent repayment plan, you would be reducing your principal (and therefore your interest) at a faster rate, which would mean paying down your debt faster and ultimately paying less over the life of the loan.
Regularly review your rates
Whilst you may have chosen the best lending solution for your situation at the time of applying for your loan, it’s important to recognise that this may not always be the best loan for your circumstances. Your objectives, your cash-flow needs and the rates available can all change over time with fluctuations in the lending environment and changes to your personal situation, so it’s important that you regularly review your loan to ensure it continues to support your needs. By keeping a close eye on market changes and setting up regular loan reviews with your mortgage broker, you can ensure you continue to receive the best rates and lending product for your circumstances.
Speak to an experienced mortgage broker
Whilst these finance strategies can be useful in helping property owners be more effective with their loans, they only scratch the surface of the potential steps you can take to maximise your finance opportunities and get on the right track to purchasing your next property. As an investor especially, speaking to an experienced mortgage broker with a knowledge of property finance can be crucial to getting the advice and support you need to achieve and progress with your property goals.
If you would like to speak to our investment finance specialists about your current or next lending solution, our consultants would be happy to discuss your needs in an obligation-free consultation. Alternatively, for more advice on how to maximise your finance opportunities, download our latest eBook on the fundamentals of property finance.