In part 2 of our post, we share some additional tips for planning a property strategy for the new financial year.
Tip #3: Cash up to cash in
Saving your tax return or bonus, forgoing luxuries and/or selling assets with a high monetary value can help you achieve your goals sooner. Contribute this money into your savings account to increase your deposit for a first, next or investment property purchase. Or, create a financial buffer by depositing it into your home loan account, which takes time off your home loan term and reduces the total interest owed.
Tip #4: Interest in advance
Investors with healthy cash flow and good savings habits might consider the tax advantages of an interest in advance home loan. These let you to pay, in advance, up to a year's worth of interest, allowing you to claim the tax deduction in the current financial year.
There are limitations to consider:
- At the end of the interest in advance term the home loan may need to be renegotiated or switched to another type, often at your expense.
- Also, because these are fixed rate loans, they are usually not as flexible as variable rate loans.
Tip # 5: Fixed repayments are luring
Some lenders have started to reduce their fixed interest rates. However, Mortgage Choice's May home loan approval data showed just 3% of new borrowers chose to take a fixed rate home loan. These home loans can provide peace of mind, keeping repayments stable over a fixed term. However, there may be fewer features on offer and you may incur significant costs to break and switch from the home loan. Variable rate mortgages tend to be more flexible with features and the interest rate, but you must be prepared for rate rises. If you want to hedge your bets and take advantage of pros from each rate type consider splitting your home loan between fixed and variable.
Tip #6: Think outside the cheapest interest rate
Choosing the mortgage with the cheapest interest rate is not always the best option. You have to take into account your current circumstances and any changes to these in the future. For example, if you plan to renovate your property in the future and the RBA was to raise interest rates and you suddenly needed to refinance your home loan would you have the ability to do so with your home loan plan? Certain home loan features can come at an extra cost but having a flexible home loan could pay off in the long run.
Tip # 7: Match the type of home loan to your goals
Think carefully about interest only versus principal and interest home loans. Although paying only the interest will not reduce the home loan amount, it will result in smaller monthly repayments, allowing you to make greater contributions to your principal place of residence or to invest in another asset, while the property grows in value through capital gains. In comparison, principle and interest home loans help you repay your debt sooner as repayments cover all the interest plus some of the actual loan amount.
Check out Reserve Bank's accurate decision to keeps cash rate at 4.5% for the recent decision to leave cash rates on hold. Also, have a look at part 1 of tips for planning a property strategy for the new financial year.
If you would like to contribute to the tips then leave us your comments below.