Expert Advice with Todd Hunter. 23/09/2016
Now, more than ever, it is important to make sure you have the best interest rate on your loan.
The simple reason is that after the last rate cut, all the lenders reduced their rates by varying amounts. It’s a minefield out there, as rates are reflective of whether you have an owner occupied loan, an investment loan or a combination of both.
The lenders have also started offering interest rates based on risk. The risk can be assessed on location of your property, the type of property you own and/or the Loan to Value Ratio (LVR). The higher the risk, the higher the interest rate. But there are lenders out there who can, and will, take on the higher risk loans at competitive rates.
Now as we are heading towards the bottom of where interest rates could head, you need to be in contact with your broker about who is offering what, in relation to fixed interest rates. Fixed rates don’t fluctuate in line with the RBA monthly decisions, they can change up or down at any given moment.
To best take advantage of the fixed rate, plus still have the ability to make substantial extra repayments, it is best to split that loan and make it part fixed and part variable. That way you can continue to make the extra loan repayments.
Now if you haven’t heard from your mortgage broker in the last six months, then I’m sorry, you have the wrong broker. As a consumer, you have no possible way of knowing all the lenders, their policies and their most competitive interest rates. They change every week, so how could you?
But your broker should!
So now you have changed brokers and refinanced your loans to a new competitive rate, what else can you do to get to your next investment property faster?
There are the usual ways of using equity to invest, renovate properties you own to increase their value and increase the rent you receive. But what if you have done all this and still want to keep buying? Well it’s time to knuckle down and get stuck into repaying your loans. What better time to do this than now, when interest rates are at their lowest?
What you may or may not know, is that when you refinanced your loans, the lender serviced your debt at an interest rate of between 7% & 8%. They do this so you can afford the higher repayments when interest rates do go up again. Call it a safety buffer – or sensible banking standards.
So if you can afford to make repayments at 7% plus, then why not make the repayments at that level?
By doing so, you will be making substantial extra repayments. For example, the repayments on a $400k home loan @ 3.9% are $435 per week. The same loan repayments at 7.5% are $645 per week.
By making this small change every week, you almost half the time it will take to repay your loan.
Where it starts to make a hug difference is that you will be able to get into your next investment property miles faster and be more able to afford the extra debt in the eyes of the banks.
So, take full advantage of the lowest interest rates we have ever had and Go, Go, Go… because they won’t be this low forever.
Todd Hunter is director, buyer’s agent and location researcher for Sydney-based wHeregroup. He is an active property investor himself and amassed a portfolio of 50 properties by the age of 31. For more of Todd's musings, visit the wHeregroup blog.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.