Consider More Then The Interest Rate

There is good debt and bad debt. Good debt is when you borrow to invest in assets and you will make money on the money you have borrowed.

 

Many investors are sold investment products that have promised future growth potential. It is vitally important when borrowing money to invest that the product provides you with income greater then the expenses of the investment. The reason for this is the investment may never grow as anticipated and you will receive an income.

When you take out any loan whether it be personal or home or any other it is important to understand you are incurring a liability. All loans are not created equal. It is important that you see what other costs are there to establish the loan, close the loan, renegotiate or make changes to the loan and any monthly expenses.

Our rule of thumb is never take out loans that have ridiculously high fees to enter or exit. Always stay with reputable providers and be wary of commission based brokers. Insist on comparisons to see that it is actually the best loan for you.

 

Never Borrow More Then You Can Afford And

A common theme amongst lenders and borrowers these days is balloon payment loans or honey moon rate loans, where the loan repayments are low at the beginning of the loan and then they increase with time. The assumption is that your income will also increase over time.

Unfortunately this is a dangerous assumption and one of the primary causes of the 2008 Credit Crisis.

Your income will not always increase, you may be unemployed, injured, ill, take time off for children etc etc.

Always develop a budget prior to taking out any loan.

 

Always Have A Cash Reserve If Things Go Wrong

If you have loans it is crucial to have cash reserves so that assets are not repossessed in the many circumstances that could confront you like divorce, burglary, injury, illness, sick relatives, natural disaster etc etc.

You should always have at least 8 months worth of expenses saved in an emergency cash fund. This amount should never be invested - no excuses.

 

Pay Mortgage Or Invest ?

This is an almost impossible question to answer in a generalized nature for people to read. It is dependent on so many factors including mortgage interest rates, investment returns, taxation rates, tax deductions for interest, time till retirement and many personal circumstances.

I could run through 15 different calculations here that would show one is better then the other and each calculation would contradict the others. So my best advice is to answer this question you really must see an expert, inform them fully of your goals and circumstances and run through a few calculations.

Even then the calculations wont give a clear answer because so many of the variables are unknown and based on projecting future rates and returns.

 

Borrowing To Invest

If you are borrowing to invest you should be familiar with these terms:

Gearing - borrowing money to invest.
Negative gearing - your borrowing costs (interest and fees) exceed the income you receive on your investment.
Positive gearing - your investment income fully cover the borrowing costs .

Deciding whether to borrow to invest needs to be made based on your personal circumstances and professional advice. Our rule of thumb is not to borrow to invest if you still owe money on credit cards, personal loans or owe more then 50% of the value of your home.

Generally speaking borrowing to invest and using the additional leverage is a good move for wealth creation. However borrowing to invest magnifies both the risk of positive and negative returns. Investing with borrowed funds magnifies the importance of investing in good quality products.

Spread you risk and never invest large amounts of borrowed funds in any one investment or with any one investment company.

 

Always factor in what you would do if interest rates increased and err on the side of caution.

Use these tips if investing with borrowed funds:

Buy high quality investments that have good income and rising income

Avoid investments that have high debt or promise well above market returns

Borrow cautiously, factor insignificant interest rate rises, and protect your income by having multiple sources of income and / or income insurance.

 

Tips For Paying Off Your Home Loan Sooner

Negotiate hard on the interest rate, and regularly ask for lower rates from your current lender. Get quotes from cheaper lenders and ask your lender to match the interest rate. Be wary of expenses if changing lenders

Make Extra Repayment - even if it is only $50 per month, these extra repayments make a massive difference. Especially if you can make these repayments early in the loan term.

Borrow cautiously, factor insignificant interest rate rises, and protect your income by having multiple sources of income and / or income insurance.

Be Wary Of Costs For Extra Features - redraw and lines of credit or equity loans offer great convenience to loan customers. But be warned they offer convenience for a reason - the bank wants to keep you in debt. The longer and more you are in debt the more money they make.

 

Never Borrow Off Shore - borrowing off shore is fraught with danger as the repayments and amounts owing vary rapidly as currencies change value. Only the most expert investors with significant experience in Forex should ever do so.

Reverse Mortgages - are a horrible product and should only be used in the most extreme circumstances, eg: to fund surgery for a terminal illness. These products warrant no further comment here other then to say you have been warned.

 

Mortgage Broker Tricks

Here is a list of the most common Mortgage Broker Tricks for you to be aware of to avoid being ripped off , or trapped in a loan you will regret.

Mortgage Broker Tricks #1 Low-Ball Offers

To get customers on the phone or through the door some brokers will advertise low-ball offers or prices that they have absolutely no intention of meeting. Once they have your contact details they will then begin to play games on you.

When its time for you to sign the advertised special will have expired or been fully subscribed and no longer available.

Mortgage Broker Tricks #2 Playing the Market  

There is nearly always a significant time between the application and the time when the loan terms are signed.  The loan terms quoted at time of application are subject to change.  When rates rise, the broker will raise the rate on the loan.  If rates fall, most brokers will leave the rate unchanged.  You should check this prior to signing the loan.

Mortgage Broker Tricks #3 Attract Then Remember

Brokers will fail to mention certain fees until the borrower is too far along the process to back out, then suddenly they remember to tell you about a certain fee or two (usually a substantial fee or fees)  
You should always request the broker provide a full written list of all fees and costs to be paid by you.

Mortgage Broker Tricks #4 Lock With No Actual Lock

Lots of brokers will charge borrowers extra to lock the rate in and fail to inform the lender. If interest rates remain constant the broker pockets the lock premium and if rates do rise the broker smashes the deal and lets the loan fall over, blaming the lender or security.

Mortgage Broker Tricks #5 Changing The Market Rate

Borrowers who elect to take a floating or variable rate during the time that lapses between application and signing the loan are guessing the rates will not go up. The market rate is what ever the broker or lender says it is, and some broker will jack up the price on the date of signing

See Our Home Loan Glossary For Help If Necessary

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Disclaimer - this information is general in nature and does not take into account your individual circumstance. You should always seek professional independent advice prior to acting on this information or making any decisions based on this information.