The Difference Between A Financial Strategist And A Broker

When an average Australian feels sick, they go to a GP and if their situation is pretty standard, that GP finds them a solution. However when they have a unique issue that requires a level of expertise beyond the powers of that regular GP, they are referred to a specialist. Sure, the GP may have a good general understanding of the illness, but it takes someone who has dedicated their professional life to having the absolute BEST understanding of that area of medicine to get the patient the outcome that they need.

It’s similar when it comes to buying property. A first home buyer, upgrader, or any other would-be owner-occupier can visit a mortgage broker and find out the loan product that suits them.
It’s a simple fix. The broker has relationships with a number of lenders, they can negotiate interest rate deals with them and recognise aspects of a customer’s finance that may be the difference between getting a loan approved or rejected and make sure the necessary elements are in place before an application is made. They can then prescribe the lender best suited to the client (out of the ones in their ledger) for this particular property purchase. In short, they have a great general understanding of the mortgage world.

See a specialist


There is nothing wrong with a good broker, but not all will take the time to analyse whether the short term loan solution they are offering up is actually the best strategy for your long term goals. So, if you’re a budding investor who wants to make a purchase now, without affecting a long term goal to buy 6, 10, 20 or even more properties, a regular mortgage broker may not cut the mustard. You will need to see a specialist… a financial strategist.

A financial strategist can help you focus on the long game. You may want to buy your first investment property and quickly release equity to also pick up your second. A financial strategist can show you how to do this without running into problems in the future when you want to be financing properties 6, 7 and beyond.

Debt strategy


Financial strategists can help you build a debt strategy; which is a plan for both accumulating debt and then removing it in the following years to free you up for further investments. They can help you with ways to structure your debt so that banks will be open to keeping on lending you money. They can educate you on features that you may not have known existed, such as security swaps, portable loans, the best ways to use debt to maximize cashflow and minimize tax and even the odd tweak that could take you forward after being stuck with one or two properties only in your portfolio.

The ability to keep moving forward and expanding now will see benefits compounded by being more invested for longer and allow you to live life on your own terms in the future.

Talk to Zinger


At Zinger Finance we have a team of strategists that specialises in helping clients build large property portfolios. We can assist everyone from first timers right up to sophisticated property investors. The Property Investor Program includes a free financial health check; advice on how to reduce debt, free up equity and leverage assets; a long term financial strategy with a step-by-step action plan; ongoing care in the form of regular portfolio reviews to make smart adjustments when interest rates, laws, policies and regulations change; and a raft of other features. You can find us at zingerfinance.com.au, by calling the office on 1300 367 925, or emailing the team at info@zingerfinance.com.au.

 

What Is A Guarantor Loan?

What is a guarantor loan? Is it right for me? How does it work?

 

A guarantor loan could help you to buy your first property without a deposit.

 

But, is it right for you? And will it stand in the way of your financial independence further down the track

 

What is a guarantor loan?

Let’s say you are 18 years old. You have just come out of the probation period of a new job and are earning a regular income. You want to buy your first property but you haven’t been able to save up a deposit.

 

Your parents, on the other hand, have a house that they have paid off. Mum and Dad still have some working life ahead of them and want to help you get started on your property journey.

 

A guarantor loan would allow them to put up their property as collateral, along with the one you want to purchase, in order to cover the deposit amount.

 

This way, you could get finance for the property without needing to raise a cash deposit.

 

How does it work?

Each of you would have to get independent legal advice before executing this strategy.

 

Then, your parents would sign to give you access to their debt-free property to guarantee the deposit component of the loan.

 

Your parents’ property, and the one you are buying, would be cross collateralised, which makes you financially tied to your parents.

 

You would still be able to access whatever first home buyer benefits are applicable as the purchase would be in your name.

 

What implications are involved?

Madhu Ramana, CEO of Zinger Finance, says you should only use a guarantor loan as a last resort.  He says there are many implications involved in this sort of structure.

 

After settlement, your parents will receive information about every credit-related activity you undertake.

 

“Because your parents are guarantor on the debt, they will be exposed to everything you are doing on a credit note,” he says.

 

This means that if you want to release equity further down the track, apply for a credit card or apply for a car loan, they will need to sign off on it.

 

You are basically tied to their hip – they have to give their formal approval on every credit application you make.

 

Another major thing to consider is that, as a guarantor, they are exposed to extra risk. If you are self-employed and come up against major liabilities, they risk facing financial hardship or even losing their house. 

 

If your parents are close to retirement, the arrangement may impact their pension.

 

Who would it suit?

Guarantor loans may be helpful for young adults starting out in their career whose parents own their home outright and are middle aged. Often, it is the parents themselves who guide their grown up child in this direction.

 

Who wouldn’t it suit?

For self-employed people who face liabilities or sporadic income, guarantor loans wouldn’t be a good choice.

 

It also wouldn’t suit anyone, whether they be a borrower or guarantor, who wants to build a property portfolio quickly.

 

Is there a better way to go about it?

Madhu says that while guarantor loans have their place in the world of finance, there are other ways to go about it without tying yourself to your parents.

 

“Should people take out guarantor loans? If that is the only choice, then by all means. At least you’ve now got an extra asset,” he says.

 

“But if there are other choices, then I would say to use that as the last resort.”

 

He compares it to working out at the gym. Let’s say your personal trainer had you doing bench presses – and your parents were sitting on top of the weight.

 

Instead of this heavy arrangement, Madhu says you could work out to a comfortable level without your parents needing to be there.

 

He says if they are prepared to be a guarantor, then they must be confident that you can handle this amount of debt. 

 

“You could also do that in a different way in which you could keep your financial affairs totally independent,” he says.

 

What are your other options?

Instead of being a guarantor, your parents could release equity from their property. Alternitavely, they could get a line of credit, and give this to you to use as a deposit. 

 

Under this arrangement, you would be legally responsible to pay back the loan but your properties wouldn’t be cross-collateralised.

 

Your parent’s property would still be in their name, and your property would be in your name.

 

To do this, you would still need to seek legal and financial advice before drawing up a contract. That contract, however, would be between you and your parents. The bank would not be involved.

 

Madhu says, it is better for each party to stay independent from one another, and reduce the limitations involved.

 

“Keep the structure simple. Keep your lives independent because you never know what life will throw at each one of you,” says Madhu.

 


Disclaimer: Please note that the information given in this video blog is only applicable to a number of scenarios and may not be relevant to your financial situation. For more tailored information regarding your own credit report, we would urge you to seek advice from a professional who is privy to your personal circumstances and can give information specific to your financial situation. Please get in contact with our team if you have any questions regarding your own credit report, or would like any help regarding your own finances.

What Does Refinancing Entail?

What does refinancing entail?

For those who already have one or two properties, refinancing can be a great way to save money and improve loan structure.

But what does refinancing entail?

Let’s break it down.

What is your current structure?

This is the first thing we look at for clients who are interested in refinancing. At Zinger we understand how important it is to structure lending correctly, especially if our clients are building a property portfolio.

How much are your properties worth?

Once we have sorted out your loan structure, we then order valuations on your existing properties. This gives us a clear idea of what we are working with.

Which lender should you choose?

Then it is a matter of narrowing it down to a few different lenders and comparing the products they offer to find the best one for you.

How will the new structure work?

After finding the right product, we then take the time to discuss how the new structure will work.

We may suggest making a few changes that will help you benefit more from the new loan. This could include changing the account splits or increasing/decreasing and redistributing certain debts.

Don’t forget to tell your accountant.

Once you have all this info from us, it is important to relay it back to your accountant so they can lodge your accounts correctly come tax time.

Everyone is different.

Since we all have different situations, it is important to speak with a finance expert who has a broad knowledge of the industry as well as a proven track record in helping people achieve their property goals.

Refinancing – The basic steps:

1) Value existing properties

2) Choose best bank and product

3) Lodge application

4) Gain formal approval

5) Settlement.


Disclaimer: Please note that the information given in this video blog is only applicable to a number of scenarios and may not be relevant to your financial situation. For more tailored information regarding your own credit report, we would urge you to seek advice from a professional who is privy to your personal circumstances and can give information specific to your financial situation. Please get in contact with our team if you have any questions regarding your own credit report, or would like any help regarding your own finances.

What Are The Different Types Of Loans Available?

Different types of loans available.

 

Depending on whether you are buying a home or an investment property, there are many different types of loans available.

Let’s take a look at some of the most common ones and who they suit best.

 

The standard variable rate loan.

 

As its name suggests, this type of loan has an interest rate that may go up or down depending on the cash rate set by the RBA.

This can be a good option to choose when it looks like the RBA will lower rates.

On the other hand, it may not be the best choice for those who want certainty in the amount they repay each month.

This type of loan would suit clients who are actively trying to expand their portfolio since it allows them to release equity without needing to break from a fixed term contract.

 

The fixed rate loan.

 

This is a loan in which interest rates are fixed for a specified term. This means that cash rate movements cannot affect your repayments.

If it looks like a cash rate increase is on the cards, entering a fixed rate term can protect you from spending more on repayments.

It can also help you streamline your cashflow since you are paying the same amount each month.

This sort of loan is not ideal for investors as it doesn’t allow you to release equity for further purchases. On the other hand, it does suit borrowers who are looking to buy one property and want certainty in the amount they repay.

 

The split loan.

 

In this sort of loan, it is possible to fix rates for one portion and leave the remaining amount variable. This gives some certainty as to the amount you need to repay each month while allowing flexibility in order to tap into equity.

If you do want to release equity, it needs to be with the same financial institution. Otherwise, you would be liable to pay break costs.

This sort of loan is great for homebuyers who are unsure if they will release equity after a couple of years in order to buy an investment property.

It’s also good for borrowers who are unsure whether rates will rise or fall.

 

Owner occupier loans.

 

These loans are for those buying a property to live in. Borrowers usually pay both principal and interest repayments in order to pay off their debt.

There is also an option to pay interest only for the first couple of years. This means you aren’t paying off the principal loan amount, so it is not a viable strategy over the long term. It can be useful for those who have a reduced income over the short term but are expecting to receive more in the near future, such as those on maternity leave.

 

Interest only investment loans.

 

Designed for property investors, these types of loans are often structured with interest only repayments for the first couple of years.

Interest rates tend to be higher than what you would get in an owner-occupier loan. This is largely because of the APRA regulations that came in a few years ago to increase lending to owner-occupiers.

Having an interest only loan can be helpful for investors who want to sell for profit after the property has gone up in value.

 

Investment loans with P+I repayments.

 

These types of loans are great for property investors who want to pay down their debt and reduce their loan size.

The interest rate is usually higher than what you’d get in an owner-occupier loan, but lower than that of an interest only option.

 

Line of credit loans.

 

Line of credit loans are only available to those who have a property. They enable you to borrow against the property’s value by providing a line of credit that is left open for whenever you need it.

You then make repayments and pay interest on whatever portion you use.

Since the purpose of this type of lend can be unclear, banks usually don’t take negative gearing into account for servicing purposes.

A line of credit can be helpful for those with an existing property who want to purchase another one but aren’t sure exactly when they will do it.

 

Equity release.

 

Similar to a line of credit, this sort of loan allows you to tap into a portion of your equity. This is better suited to investors than a line of credit because you receive it as a lump sum amount that you start paying interest on immediately. Many investors tap into their equity and use the lump sum they receive as a deposit for their next property.

 

SMSF lending.

 

Most of the major banks have pulled out from this type of lending, with only second tier lenders getting involved.

SMSF lending is full of restrictions. The LVR needs to be no greater than 70% and the properties that you invest in can’t come from certain postcodes that are deemed higher risk. If the property is part of an apartment complex, there are also restrictions on the number of units that can be in the building.

To borrow through your SMSF you must have a statement of advice from a financial planner. It is also best to see a mortgage broker who specialises in this type of lend.

I Have Saved Up My Deposit … What Next?

I Have Saved Up My Deposit … What Next?.

If you have saved up a deposit, and are unsure what to do next, you are not alone.

We often get asked “What next?” by borrowers who are ready to start the loan application process but don’t know where to begin.

Assemble your success team.

Whether you are looking to buy your first home or build an investment portfolio, you will greatly benefit from having the right team of professionals around you.

A good accountant, solicitor and buyer’s agent will help you navigate the buying process. They can offer sound advice about structuring and negotiating as well as your rights and responsibilities.

Don’t forget your broker.

When it comes to borrowing, the most important expert you can call on is a finance strategist.

The biggest advantage of using a mortgage broker is that they have access to a wide range of lenders and products.  

If you have specific needs, a broker can hunt down the best type of loan available. If you deal with a bank directly, you will only have access to that bank’s loans. Keep in mind that they may not have what you are looking for.

A good broker will guide you through the loan application process. They will tell you everything you need to do to get the ball rolling.

They will assess your situation and find the most appropriate loan for you to apply for.

This will help you avoid being knocked back by lenders. It will also help increase your chances of success both now and further down the track.


Disclaimer: Please note that the information given in this video blog is only applicable to a number of scenarios and may not be relevant to your financial situation. For more tailored information regarding your own credit report, we would urge you to seek advice from a professional who is privy to your personal circumstances and can give information specific to your financial situation. Please get in contact with our team if you have any questions regarding your own credit report, or would like any help regarding your own finances.

Why A Low Interest Rate Shouldn’t Be A Deciding Factor

Why a low interest rate shouldn’t be a deciding factor.

 

It’s great to save money on a cheaper rate loan. But, sometimes choosing a low interest rate can cost you more in other ways.

 

In fact, there are a whole host of other factors to consider before lodging a loan application that could make or break your ability to access equity, refinance or purchase further properties down the track.

Looking beyond the allure of low rates.

Kabir from Zinger finance says that while it is important to secure a competitive rate loan, there are many other things borrowers should consider.

 

“Low interest rates can be a factor – but, not the only one.”

 

He says borrowers should look at how the lender values properties, as well as its policies on what it does and doesn’t accept before making a decision.

 

Instead of saving $150 per month on interest repayments with a cheaper rate loan, he says it may be possible to fund a subsequent property purchase by going with a lender who values your property higher.

First and foremost, look at your plan.

Kabir says it is important to assess your specific needs and goals before deciding which lender to go with.

 

“It all boils down to the client’s plan.”

 

He says low interest rates should definitely not be a deciding factor for those looking to build an investment portfolio.

 

How does the lender value properties?

Often, lenders will run special promotions where they offer a discounted rate – but there can be hidden opportunity costs involved. Under these promotions, lenders will often lower their valuations on properties. This means that an investor looking to build their portfolio may not be able to access as much equity as they could have done with a different lender.

 

And while some banks will give really good valuations, they may not be that great at offering competitive rates. It’s a give and take thing.

 

How much can you save by choosing a low interest rate?

According to Kabir, banks are currently competing on a more even platform than they used to. The difference in rates can’t be too high from lender to lender, and generally doesn’t exceed 0.5%.

 

Banks have different policies.

It is detrimental to make sure you lodge your loan application with a lender whose policies fit in with your situation and goals.

 

Kabir says borrowers should speak with a broker or to the bank they are looking to use in order to confirm all of their details regarding employment, income and what they are looking for. 

 

“Get a confirmation first as to whether it fits into the bank’s policies before lodging a pre-approval or a loan application.” 

 

This is important because every loan application you make is included in your credit report – which is the first thing lenders look at when assessing if you are a desirable customer.

 

The more enquiries you make, the lower your score will drop. If you keep going from bank to bank and getting knocked back due to their criteria, you may then miss out on a bank that would have lent to you based on their criteria, because of your credit score.

 

Other employment types.

Those who are self-employed or employed on a contract basis may want to go with a lender who has the lowest rate. But, this lender may have stricter requirements when it comes to assessing serviceability. They may require a full year’s financials when you may only be four months into a contract. Whereas, other lenders may not require this, but their rates could be a bit higher.

 

What should people look for when choosing a loan?

Whether you are an investor or a home buyer, it is important to understand what features you need in a loan before making a decision.

 

Then, it is a matter of finding the right lender whose policies support your situation as well as the right loan that can help you achieve your financial loans.

What should investors look at when choosing a loan?

Kabir says investors who want to build a property portfolio should look at the following things first and foremost before considering interest rates.

 

1) How do different lenders value properties?

You can find this out by speaking with a broker. At Zinger finance, we have the ability to order an upfront valuation without charging our clients for it. 

 

We can then compare them to figure out which lender will give the best valuation before deciding which bank to lodge the application with.

 

This is important because it can affect the borrower’s ability to fund their next property purchase as they build an investment portfolio.

 

2) Which lenders will give the maximum amount of equity? 

Some lenders put a cap on the amount of equity they will let you pull out, so even if they have valued the property favourably, you may only have access to a small amount of it.

 

Others require strict documentation in order to release equity, such as a contract of sale. Whereas others only require you to state the purpose of release.

 

3) To fix or not to fix?

If you decide to fix rates for a set term but then decide to refinance in order to pull out equity before the end of the term, you will have to pay exit fees. 

 

It is important to make a sound decision before fixing rates to avoid paying break costs.

 

But, if you are unsure whether you will want to pull out equity yet you want some stability in your loan repayments, you may be able to enter into a split loan, in which a portion is fixed and the rest is not.

 

In this case, if you want to release equity, you will have to do it with the same financial institution, so it is important to look at how well they value properties before deciding.

What should first home buyers look for in a loan?

While first homebuyers would benefit from getting the best rate available, it is still important to weigh up all the options before making a decision.

 

If you want to release equity from your home in order to buy an investment property, then you should consider the same factors that a portfolio building investor would.

 

If, however, you want to buy a home and you are sure you won’t be tapping into its equity, then you should try to find the lowest rate available. However, you need to make sure that the bank’s policies fit in with your needs.

 


 

Disclaimer: Please note that the information given in this video blog is only applicable to a number of scenarios and may not be relevant to your financial situation. For more tailored information regarding your own credit report, we would urge you to seek advice from a professional who is privy to your personal circumstances and can give information specific to your financial situation. Please get in contact with our team if you have any questions regarding your own credit report, or would like any help regarding your own finances.

How To Structure Your Home Loans

How To Structure Your Home Loans.

Whether you are purchasing a home or an investment property, it is important to structure your home loans correctly. This will help you get the most out of your borrowing power over the long term, and ensure you can take action to achieve your financial goals through property.

Things we consider when looking at loan structuring.

At Zinger, we consider loan structuring to be a crucial part of every property purchase. We look at the following aspects when helping our clients get finance:

1) Are we declaring the right debt?

2) Are we over or under declaring owner occupier versus investment debt?

3) Are there any accounting benefits to what the client’s current structure holds.

Structuring doesn’t end after the first purchase.

While it is important to get your structure right from day one, it is also important to revisit it during every purchase you make. 

If you are building a property portfolio, structuring is something that could either help you move forward or hold you back.

Just as a good property investor will constantly review their strategy, a savvy borrower will reassess their loan structure at every step of the way.

Restructuring your loans.

One thing we look at with clients who have become stuck in their current structure, is whether restructuring will help. 

We have helped lots of people who couldn’t move forward with their property investing by reassessing their situation. 

One of our clients had a fairly large investment portfolio as well as a home that they were paying off. 

We went back to when the initial loan was set up and reviewed their accounting information. 

We were then able to restructure their existing portfolio and free up their position. This allowed them to continue on their investing journey.

If you are unsure about how to structure your home loans, the best thing you can do is talk with a broker who specialises in this. Not all brokers put time and effort into setting up loans in the best way for their clients, so make sure you choose one who will listen to your goals and help you tailor a strategy for success.


Disclaimer: Please note that the information given in this video blog is only applicable to a number of scenarios and may not be relevant to your financial situation. For more tailored information regarding your own credit report, we would urge you to seek advice from a professional who is privy to your personal circumstances and can give information specific to your financial situation. Please get in contact with our team if you have any questions regarding your own credit report, or would like any help regarding your own finances.

Are You Benefiting From The Full Interest Rate Cut?

The new financial year brought a new, record low interest rate when the Reserve Bank of Australia (RBA) reduced the rate on 2 July by 0.25 basis points to 1%.

What does this mean to you, the homeowner?

Well, it depends on which bank you are with. Not every bank has passed on the rate cut in full.

 

CommBank has said that it will lower its rates but not for everyone. It is only customers who have interest-only loans that will benefit from the full 0.25% reduction.

If you are an owner-occupier or an investor who is paying a principal and interest standard variable rate home loan, you will see a reduction of 0.19%. You will start to see the benefit of these rates cuts on 23 July 2019.

Angus Sullivan, CommBank group executive of retail banking services, explained that this decision was based on the need to ensure that the benefits of further interest rate reductions and the cost implications of such maintained an equilibrium.

 

NAB followed suit, announcing that they will be reducing their variable home loan interests by 0.19%. Mike Baird, their chief customer officer for consumer banking, explained that costs and competitive pressures were the driving force behind their decision not to pass on the full rate cut.

“The difference between what we charge and how much it costs us to fund a mortgage remains under pressure and while the circumstances of each RBA cash rate decision will vary and has some influence on the cost of borrowing money, it is not the only funding cost driver for NAB.” 

 

Westpac is lowering their rates by 0.20% and 0.30% for owner-occupiers and investors with interest-only repayments respectively and will make their changes from 16 July.

 

ANZ is the only one of the big banks that has said they are passing the rate cut on in full, following a backlash after their decision to only share 0.18 if RBA’s June cut.

They will be lowering their variable rates for both owner-occupiers and investor loans in full, starting 12 July, confirmed by ANZ retail executive Mark Hand.

 

Right now is a great time to be assessing your current loan structure.

We always talk about how we don’t place emphasis on finding loans simply for the lowest interest rates. But if you haven’t had a Financial Health Check or review recently, with all the changes that have been happening in the finance industry, now could be a great time to get in touch with one of our Finance Strategists, to see if you are getting the most out of your home loans.

A lower interest rate could be a nice little bonus, but nothing comes close to the benefit of structuring your home loans in the best possible way for achieving your goals!


What Is A Credit Report?

Credit Report 

Now that banks are using comprehensive credit reporting as part of the loan application process it has become crucial to maximise your credit score and choose a broker carefully.

What is a credit report?

A credit report is an extensive record of all your finance enquiries. It includes any missed or late payments for things such as phone and electricity accounts as well as credit card and mortgage commitments.

It also includes every single credit application submitted.

If you have applied for a few home loans and either got knocked back or decided not to go ahead, it doesn’t leave a good impression on your credit report.

The same applies if you have missed or delayed any bill payments or loan repayments.

What is comprehensive credit reporting (CCR)?

In a recent move, banks and lenders will now use comprehensive credit reporting as part of the application process.

CCR offers a much more detailed picture of the borrower’s financial commitments, and doesn’t just look at negative hits recorded for missed payments.

If your lender does a comprehensive credit report on you, you will need to provide statements for every account held over the past six to 12 months, as well as evidence of all assets and liabilities included in the loan application.

How can you prevent against a poor credit score?

Here are some tips to ensure you put your best credit foot forward when applying for a loan:

1. When shopping around for a loan or a credit card, make sure you have a clear purpose and are confident with where you are heading.

2. Avoid submitting loan applications unless you are sure you are eligible and will follow through with it.

3. Be wary of mortgage brokers that may submit applications to multiple lenders instead of submitting enquiries.

4. Choose a mortgage broker who will research the best loan for you based on their knowledge of a range of products from different lenders. The application you then submit should be the application you will proceed with.

5. Stay on top of all of your financial commitments. The best way to do this is to set up direct debits for all of your bills and repayments. Make sure you always have enough money in your bank account to cover them. This will create a positive impression on your bank statements and improve your credit score.

6. If you have forgotten to pay a bill on time make sure you pay it ASAP to prevent a negative mark from occurring on your credit report.

7. Make sure you have no gambling, or other financial expenses deemed ‘risky’ by lenders, showing on your bank statements.


Disclaimer: Please note that the information given in this video blog is only applicable to a number of scenarios and may not be relevant to your financial situation. For more tailored information regarding your own credit report, we would urge you to seek advice from a professional who is privy to your personal circumstances and can give information specific to your financial situation. Please get in contact with our team if you have any questions regarding your own credit report, or would like any help regarding your own finances.

Interest In Advance

Interest in advance.

 

If you have an investment loan, you may be able to save money and streamline your cashflow by paying next year’s interest in advance.

 

According to Madhu Ramana, CEO of Zinger Finance, most people don’t know this option is available – yet there are plenty of people who would benefit from it.

 

How does it work?

If you have a property loan debt, it may be possible to refinance with an applicable financial institution and pay the interest component for the next financial year in advance.

 

For instance, if you had a loan as of May 2019, you could choose to pay interest from the 1st of July 2019 to the 30th of June 2020 as a lump sum payment.

 

To do this, you would need to refinance to a fixed rate loan that includes this option. So, if you have a variable rate loan with a bank that offers it, you would just need to do a product switch.

 

If you are already on a fixed rate loan, you would need to break the contract in order to refinance. This would mean paying any applicable penalties such as early exit fees.

 

If your lender doesn’t provide this option, you would need to refinance to a different institution that does.

 

You can only pay 12 months’ interest in advance and the arrangement is done on a year on year basis.

 

How does it help you save money?

Madhu says that lenders reward you with a discounted interest rate if you pay interest in advance. This means you are able to save a decent chunk of money out of your usual outgoings.

 

He says the amount of discount depends on the loan size and a range of other considerations, but he has found that during the past the discount has ranged from about 0.15% to 0.3% – though this is no guarantee in the current market.

 

How does it affect your tax?

By paying next year’s interest in advance, it is possible to claim it as a tax deduction in the current financial year.

 

Madhu says it is important to work closely with a good accountant and financial planner when using this strategy as there are certain terms and conditions as to who can benefit from it.

 

What are the strengths of this strategy?

One advantage is that it helps to streamline your cashflow. You don’t have to worry about making monthly repayments because you have already paid it in full for the year.

 

Madhu says this can be particularly helpful for self-employed people. If they have earned quite a lot of revenue during the year and forecast a tighter year ahead, paying interest in advance means they don’t have to worry about their monthly repayment obligation.

 

Higher income earners who get paid dividends, bonuses or franking credits can also use this strategy in order to get tax breaks. After exhausting excess capital by paying interest in advance, it is likely they will receive a good portion of it back in the form of a tax refund.

 

And, since you get a discounted rate by paying it in advance, you end up spending less money on interest. This can help your serviceability if you want to apply for another loan.

 

Who can benefit from paying interest in advance?

Aside from helping high income earners and self-employed individuals, Madhu says this strategy can also help investors with large portfolios.

 

Those who are getting close to maxing out on the amount of money they can borrow can often use this strategy to their advantage. Not only does it allow them to structure capital in a tax effective way, it also improves their credit rating dramatically.

 

How does it improve your credit rating?

In the current finance environment, lending history is very important says Madhu.

 

If you apply for a new loan, it is most likely you will have to provide a six-month lending history that shows you have made every repayment in full and on time.

 

“If you miss one repayment, the bank is not going to lend you money for at least a period of six months,” says Madhu.

 

Banks really like it if you have already paid the next year’s interest in full.

 

“You’ve paid off 12 months in advance so there are no arrears – your account is in mint condition,” he says.

 

This improves your credit rating to the extent where most banks will happily lend to you as long as you meet the rest of the criteria.

 

The downside of paying interest in advance.

The only weakness of this approach, says Madhu, is that it means parting with a big chunk of capital.

 

Depending on your strategy as an investor, this may affect how much money you can put into your next deposit.

 

But, if you are a sophisticated investor who works closely with your accountant and financial planner, you should be able to identify how much capital you can part with in the lead up to EOFY, as well as how much tax you will get back in return. This can help you decide whether paying interest in advance is the right strategy for you.

 

Madhu says that aggressive investors who are constantly negotiating on deals would probably not benefit from this approach. Since they always need to have capital at their disposal, paying interest in advance would be counterproductive to their strategy.

 

If you are not sure whether this strategy would work for you, the best thing you can do is talk with your accountant and financial planner as well as a finance strategist who knows how to build a property portfolio.


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