Ok so it’s official – we are in a recession. Not the one we had to have, but the one that has come due to Covid restrictions driving business down. Yep it’s that simple.
The good news is if we can get back to business sooner rather than later, we will bounce back quite quickly. So it’s not time to panic just yet, but it is time to review your situation.
In our last blog, we spoke about preparing for potential opportunities in the property market. Yes, we expect prices to fall. By how much is anyone’s guess.
In this issue we will discuss the need to review your financial situation. The simple why, how and when of financial reviews.
It’s common for us to see advertisements such as “get a home loan health check” or “review your insurances”. They never really go into depth of WHY. So let’s start with that.
Why review your finances?
Albert Einstein is credited with stating: “The most powerful force in the universe is COMPOUND INTEREST”
Benjamin Franklin even agreed.. “money that makes money, that makes money…..”
Our issue is when we have debt, that goes in favor of the Banks… not you and I. While your home loan “amortises” (reduces) over the life of the loan, every percentage point is additional money out of YOUR pocket. And it adds up… enormously.
Let’s set this out as an example
Current Situation
| Home Loan Balance | $500,000.00 |
| Loan Term Remaining | 25 years |
| Current Interest Rate | 3.25% |
| Monthly Repayments (Principal and Interest) | $2,437.00 |
| Total repayments | $731,100.00 |
| Total Interest charged | $231,100.00 |
New Situation after refinancing
| Home Loan Balance | $500,000.00 |
| LOan Term Remaining | 25 years |
| Current Interest Rate | 2.75% |
| Monthly Repayments (Principal and Interest) | $2,307.00 |
| Total repayments | $692,100.00 |
| Total Interest charged | $192,100.00 |
Saving over the life of the loan of $39,000.00
If you kept the same repayment you are making prior to the refinance and applied it to the new loan, you would have the loan repaid in 23.1 years, and save an additional $17,051.
But we also need to be careful.. most banks will try and get your term out to another 30 years. It is critical to know the longer you have the loan for, the more money the bank takes out of YOUR pocket!
| Home Loan Balance | $500,000.00 |
| Loan Term Remaining | 30 years |
| Current Interest Rate | 2.75% |
| Monthly Repayments (Principal and Interest) | $2,041.00 |
| Total repayments | $734,760.00 |
| Total Interest charged | $234,760.00 |
While your repayments would reduce by $266 per month, you would end up paying an additional $42,660 in interest!
However, this additional cash flow may be important to you at the time, so that also needs to be considered.
Other things to consider along with reducing your interest rate are:
- Do you have the right loan structure in place? This can also be costing you even more money than a high interest rate, as well as putting your property(s) at risk
- Can you leverage your home to purchase an investment property?
- If you are an investor, can you improve your cash flow position to make life easier for you or potentially purchase another property?
You can apply this method to all your insurances, (life, house and contents, car etc), along with all your utility bills as well. We recommend this is done at least annually. And even more so as we move into the recession. Every dollar will count.
So now you know what to do and why, the next step is how. It is as simple as giving Ben a call at HTA to run through your finances, and provide a simple mathematical equation in which you can easily compare your options, allowing YOU to make an informed an educated decision.
