September 26, 2018

Author Archives: Marxa Dillan

About the author  ⁄ Marxa Dillan

How Hipsters Can Influence Property Prices

Real estate in Australia isn’t immune to the trendsetting abilities of hipsters, who can raise the desirability of a suburb and, accordingly, its property prices.    

Tastes are always evolving.

Perhaps you couldn’t have imagined your grandmother eating anything that was Japanese, or maybe your parents never had Mexican when they were growing up.

But if you were to look in the food court of any suburban shopping centre these days you’ll see people of any age eating sushi and tacos like they’re toasted sandwiches.

The tastes, lifestyles and ideologies of society seem to gradually evolve as different generations pass through the cultural limelight.

But before changes become fully entrenched, there’s a particular mob that appears to adopt them early and forge the path to mainstream acceptance – hipsters.

Who are hipsters and how do they influence property?

Hipsters are often characterised as a subculture of people who follow or adopt alternative trends (in fashion, food, music, arts, design etc.) in a seemingly deliberate manner – unintentionally (or so they like to think) setting new standards for what’s in style. If you think about it, every generation has had its own version of these people (e.g. the jazz aficionados of the 40s, the mods of the 60s, grunge culture in the 90s etc.).

 

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Above: Jazz icons like Charlie Parker were symbolic of hipster and beat generation subcultures  

Evidently, real estate can fall within the powerful influence of hipsters.

Every city has a suburb which you wouldn’t have dreamed of buying in until hipsters moved in (establishing cafes, art studios and/or craft beer micro-breweries) and shifted the wider perception of the area from ‘generic and dull’ to ‘edgy and cool’ – precipitating a rise in the average property price of the area.

This form of metamorphosis is popularly known as gentrification.

As a generalisation, hipsters don’t get sucked into the race for bigger houses, whiter fences or manicured lawns. They tend to gravitate towards areas which are urban, expressive or communal.

The difference between a ‘no way’ suburb and ‘uber cool’ is a number of artisan bakeries, a community garden, bike parking, a yoga studio, a beard specialist barber and an alternative primary school. Redfern in Sydney is one somewhat recent example, Brisbane’s West End another.

Close proximity to the CBD is typically a prerequisite for such areas – within the ‘goat’s cheese curtain’/’latte belt’ that separates the inner and outer suburbs.

But small country communities or beachside towns can also be popular with hipsters due to the ability to live an independent, ‘natural’ life; think Byron Bay (NSW) or Healesville (VIC).

Once the trendsetters move in and provide or demand particular products and services, these areas are quickly gentrified, and property prices may rise.

The Two-cent Takeaway

This isn’t to say that it is only hipsters who change the shape of real estate in Australia. They typically set up in areas that have huge potential already.

Nor should you make investments, real estate or otherwise, purely on a single factor.

But before you write off areas based on your personal distaste, consider its individual merits. If the hipsters are moving in, it might be worth taking another look.

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Is it better to rent or buy property?

Opinion: David Lammey, Firstmac’s General Manager of Digital Brands

Answering the question of whether to rent or buy a property seems simple enough, but when you consider the multitude of factors at play, it is anything but! Trying to boil it down to an answer which is going to work for most of us is even more difficult because we Australians have different lifestyle and financial priorities.

So to narrow it down a bit, let’s assume that our motivation is purely financial (and not so much about avoiding landlord inspections or being able to hammer a nail into a wall so you can hang your favourite painting).

The next step is to start listing out all of the money ‘ins’ and ‘outs’ associated with each option. This step itself could take a month of Sundays, and that’s before we then start treading the treacherous path of making assumptions around the timeframe of the comparison and the mountain of economic factors that impact the calculations (eg. home loan interest rates, investment type and their returns, property capital growth, inflation, etc…).

All sound too hard? It probably is.

So rather than trying to come up with a complex piece of financial design which looks beautiful and is very clever (but completely impractical and of no use to anyone individually), what we could do is highlight a relatively small number of simple questions for you to ask yourself which will help you make the decision for yourself.

Are you able to commit?

The first question you need to ask yourself is ‘can you commit’ to a home loan? This is not a relationship question – it’s about the added responsibility of being a homeowner.

It’s hard enough to save for a property deposit, let alone to hook into what is essentially packaged as a 25-30 year repayment plan.

Are you willing to keep your shoulder to the wheel on loan repayments, insurance premiums and council rate bills? How about the maintenance and repair costs?

Buying property can be a little bit like opening Pandora’s box in that once you’ve purchased it, it is somewhat difficult to ‘un-buy’ the property (and release yourself from the material responsibilities) and emerge unscathed.

Of course you can sell it, but the transaction costs of doing so (eg. real estate agency fees), along with those costs you incurred when you bought it (eg. stamp duty, etc.) can leave you more than just a little bit damaged, not to mention the potential that you might not even sell the property for at least the amount that you paid for it. You could very well be left out of pocket.

Property values (in many places, but particularly in Sydney and Melbourne) have by and large increased at a fair clip over the past seven or eight years, so most punters haven’t faced the prospect of selling at a loss. But as we move into a far more neutral (and in places, negative) phase of the property market, this risk does loom larger.

But back to commitment. If you are willing to commit to buying and owning property, it often can deliver you a better outcome than if you had rented property, simply because it is a form of forced saving. Think about it, if you rented instead, what is the likelihood that you would firstly save up a bundle of cash (as you would for a home deposit) and then invest those funds (and then keep saving and investing – similar to you making home loan repayments) – into other asset classes such as shares? This leads to the important second question…

Are you knowledgeable about investing? 

If you’re considering renting, how much do you understand about other ways to make money by investing (eg. in other asset classes like Australian shares, commercial property, international shares or exchange-traded funds)? Many people don’t know very much about these things, and while buying a home is no simple matter, after the initial purchase, it is often a simpler and somewhat ‘hands-off’ way to build your financial position over time.

Do you have a long-term view?

Buying property for the long-term (eg. let’s say more than 10 years), can maximise your chances of benefiting from a capital gain in the property’s value simply by boosting your ability to ride out any short to medium term bumps in the property market. A short-term property purchase can place you at the mercy of these factors. There is an old saying that goes ‘…it’s a long way down the road without a turn…’ and it definitely applies here.

Are you motivated by the carrot or the stick? 

This question is somewhat related to the first ‘commitment’ one, but comes at it from an angle which looks at what better motivates you! Forget about the carrot part of the ‘carrot or stick’ equation for a second and focus on the stick – the punitive/punishing concept. The pain of a failed mortgage driven by not making the necessary repayments is a strong motivating factor for some, while others might have more of an easy-going ‘what will be will be’ attitude and approach.

In this sense, the former personality is driven to make the repayments by the fear motivation of the mortgage.

On the flip side, a ‘savings goal’ lacks that fear factor because the only person who is going to take punitive action for not hitting the savings target is the individual themselves! There is no automatic ‘poison pill’ for NOT making a saving ‘contribution’. So if you find the ‘stick’ a strong motivating factor, then buying is also likely to be a good option for you.

Are you a deal hound?

The final question centres around your ability to find a deal. This one’s really important because it’s not just about buying property at a good price, but also your ability to nail down a good home loan. A good property purchase is one where at the very least, you don’t pay more than what it’s worth and there is potential for capital growth over the medium-long term.

A great property purchase is one where you are able to secure a price which gives you some capital gain at the front end of your ownership – for example, you get it for less than what it is worth due to some abnormal circumstances such as the seller having a hard deadline to meet.

The same goes for securing a good home loan. It’s fair to say that when people buy a property, they probably spend more than 90% of their time picking the property, with little time spent picking the best home loan for them.

A quick scan of the interest rates on offer in the market (at the time of writing) for owner occupier, principal & interest home loans shows there’s over 230 basis points (2.3 percentage points) of difference between the highest and lowest rates on offer! On the average Aussie home loan (currently sitting at around $400,000), this difference represents more than $200,000 in additional interest payments over the 30 year life of the loan.

So if you’re someone who likes to chase a deal, who is happy to put the time and effort into researching not just the property market but also the home loan market, then you’re probably going to be better off buying property as opposed to renting – simply because of your ability to sniff out a deal (and avoid a bad one).

The Savings Tip

So what is the saving lesson in all of this? Well, there are actually several.

The first one is that it is critical to avoid making a bad decision here on the Rent vs Buy choice. If you are NOT the type of person who:

  • is able to make a reasonable (at least) medium-term commitment,
  • understands the importance of timing,
  • has a healthy fear of being punished financially for breaking rules (like making repayments on time) and
  • who is good at searching out a deal,

…then buying a home may not provide you with a better option than renting. In fact, buying a home here might put you in a worse-off position financially than what you were before you even considered the choice of rent or buy!

The other saving lesson here is that there is probably a lot more financial upside to focusing on choosing the right property and home loan than what there is in trying to untangle the ‘birds nest’ of detail in picking a winner out of buying or renting.

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4 Major Factors Influencing Your Car Loan Interest Rate

If you’re looking at car loans, it pays to be prepared. We look at some of the factors that can influence the interest rate you can get on a car loan.

What is a car loan interest rate?

When applying for a car loan (or any type of loan for that matter), it’s important to look at interest rates. An interest rate is essentially a fee you’re charged for borrowing money from a lender. It is expressed as a percentage of the total loan amount per annum (or year).

There are a number factors that can influence the potential car loan interest rate you can get – such as your personal finances, credit history, deposits and not to mention the amount of shopping around that you do. Let’s have a closer look at some of these factors.

Financial Status

The first thing a lender will want to see when determining your car loan interest rate is evidence of your financial status. Factors like your current income, other loans or credit you might be paying off and your spending habits have a big influence on your potential interest rate. A way to help reduce this process is to sit down and calculate how much you can realistically afford each month. A car loan calculator can be a great tool to help you figure out how much repayments will cost you.

Vehicle age

Vehicle age is another thing that lenders will take into consideration, with some lenders refusing to loan if the car is older than five years. This is because cars are one of the common purchases that lose value (depreciate) over time. If you default on a payment and the lender has to seize your car and sell it, they may not get the full amount they’re owed back from the sale. This is not good business for a lender!

There are some lenders that will still provide a loan for a car over five years old, but they will usually charge a higher interest rate to factor in the additional risk they are taking on with that particular loan.

Credit history

Your credit score indicates to a lender how much of a ‘risk’ you are as a borrower. Many people think that by applying to multiple lenders at the same time, they can get the best interest rate possible. However, each time you apply for credit, your score can be negatively impacted – so making multiple applications could backfire and end up impacting your credit score which will impact your interest rate. Make sure you’re aware of your credit rating before applying for a loan because if your application is rejected by the lender, this could also impact your credit history.

Your research

Did you know that the difference between the highest and lowest car loan interest rates on the market at the time of writing is more than 9% p.a.? While there are some factors outside of your control that can determine your car loan’s interest rate, you can always shop around to give yourself a better chance of securing a good rate. By doing some research, you could be saving yourself thousands in interest payments over the life of the loan. That’s money that could be put towards your home loan, savings, renovations or even a holiday. Ultimately, interest rates are calculated on personal circumstances but there’s no harm in being prepared.

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How To Choose Between a Fixed or Variable Home Loan

Choosing between a fixed or variable rate home loan is a common dilemma for many borrowers. We look at what they are and outline some of the key advantages and disadvantages of both to help you decide which option is suitable for you.

What is a fixed rate home loan?

A fixed interest rate home loan is a home loan with the option to lock in (or ‘fix’) your interest rate for a set period of time (usually between one and five years). One of the main advantages of this is cash-flow certainty. By knowing exactly what your repayments will be, you’ll be able to plan ahead and budget for the future. This factor often makes fixed rate home loans very popular for investors over the first 2-3 years that they own a property for.

Another reason why a fixed rate may be a good option for you is that any interest rate rises won’t affect the amount of interest you will have to pay. However, if interest rates drop, you might be paying more in interest than someone who has a variable rate home loan.

It’s also important to note that often additional loan repayments are not allowed with fixed-rate loans (or only allowed if you pay a fee). Because of this, the ability to redraw is also frequently not offered on a fixed rate loan, effectively reducing the flexibility of the loan.

What is a variable rate home loan?

A variable rate home loan is a home loan where your interest rate will move (or ‘vary’) with changes to the market. This means your interest rate can rise or fall over the term of your loan.

Variable home loans also have appealing features like the ability to make extra repayments (often at no extra cost) to help you pay off your loan sooner and save you interest. Another advantage can include unlimited redraws (where you ‘draw’ back out the extra repayments you made).

Variable rate loans are more uncertain than fixed interest rate loans. This can make budgeting for your interest payments more difficult because you have to take into account potential rate rises. If you aren’t prepared, you could have trouble keeping up with repayments.

Can I split my loan?

A popular home loan option is to split your loan between fixed and variable. This allows you to lock in a fixed interest rate for up to 5 years on a portion of your loan, while the remainder is on a variable rate. Effectively, this can help you ‘hedge your bets’ on an interest rate rise or cut, minimising the risks associated with interest rate movements. At the end of the fixed rate period, you have the choice of fixing that portion again (at the current market rate for fixed interest) or simply letting it revert back to the same variable interest rate that you are paying on the balance of your loan.

Interest rate risk

Trying to predict home loan interest rates can be a risky business, but in effect, every homeowner is doing this whether they decide on a variable interest rate or fixed. If you’re new to the market or worried about interest rates going up sooner rather than later, then fixing all or a portion of your loan could be a good strategy. A quick look at what’s on offer in the market for 3-year fixed rates at the time of writing shows that the premium you’d pay to fix your rate could be around 25 to 50 basis points (0.25 to 0.50 percentage points). Our last RBA rate change was back in August 2016, so banks charging a higher price on a fixed rate could be them anticipating that the current variable rate is going to go up by this in the next 3 years and could possibly continue into the medium to long-term.

Home loans depend on your individual circumstances, attitudes and motivations.  If you’re new to the market and don’t feel comfortable taking any risks then you may want to consider choosing a fixed rate home loan, much like many new property investors do for the first several years of their investment property loan. If you’re more confident with interest rates and are happy to be paying what the great majority of other lenders are paying (relatively speaking), you may find a variable rate home loan is more suited to your needs.

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What is a Car Loan Balloon Payment and How Does it Work?

Learn exactly what a car loan balloon payment is, why you might consider it and how it could affect the cost of your car loan.  

What is a balloon payment on a car loan?

A balloon payment or “residual value” is an agreed-upon lump sum that you will pay to your lender at the end of the car loan term. Effectively, the balloon amount builds over the period of the loan by diverting a portion of your interest payments into it, so that your monthly payments (from a cash perspective) are reduced. Balloons are usually a significant lump of your loan amount (eg. 30-50%), which is why they have the ability to reduce the amount of your monthly repayments in such a substantial way.

For example, if Daniel took out a $30,000 car loan for 5 years at 6% interest and had a (30%) balloon of $9,000, his monthly payments would be reduced from $579.98 (no balloon) down to $451.  At the end of his loan term, he would then have to pay the $9,000 sum left over in full.

It’s important to remember that while car loan balloon payments are helpful because they reduce your monthly repayments, they do in effect charge you more in interest across the term of the loan. Looking at Daniel’s case a little closer, we see that with a 30% balloon, Daniel’s interest costs are $1,260 more.

Cost of a $30,000 5 Year Car Loan at 6% Interest Rate (Excl. fees)
30% Balloon No Balloon
Monthly Repayments $450.99 $579.98
Total Repayment after 5 years (Repayments + Balloon) $36,059.40 $34,798.80
Interest Costs $6,059.40 $4,798.80
Cost Difference +$1,260.20

Source: Loans.com.au Car Loan Calculator.

Why you might consider a car loan balloon payment

There are a number of reasons why someone might consider having a balloon payment on their car loan. The first is that the repayments are less per month when compared to a car loan with no balloon. This provides a lot more cash flexibility, particularly for people who may have other expenses to pay (or less income coming in) for the period of the loan. It can also have the added benefits of qualifying for a larger car loan amount.

A lot of people also consider car loan balloons because there is an option for them to trade in their car at the end of the term and use the proceeds to pay off the balloon. They can then apply for a new car loan to fund the purchasing of a replacement vehicle. This is quite common for business car loans.

What is the process when the balloon payment is due?

The balloon payment must be made as a lump sum once the car loan has expired. There are typically a number of options available once the payment is due.

  • If the borrower wants a new vehicle, they can sell the car and use the money to make the payment and finalise the loan. The borrower is then entitled to buy a replacement car and if they wish, apply for a new car loan to pay for the replacement vehicle. If the car is being traded in as a part of the payment for the new vehicle then the Balloon Payment can be included in this process.
  • If the borrower wants to keep the vehicle, they can make the payment in cash, roll over or refinance the payment into another loan.

Balloon payments in business car loans

Because of the flexibility of smaller monthly repayments and the opportunity to replace your car every three to five years, balloons are commonly found in car loans for business and commercial purposes. Reducing the monthly repayments on a car loan can help a business to manage its short-term cash flow more effectively, while the higher interest rate charges can be claimed as a tax deduction.

If you’re interested in taking out a car loan balloon payment for business purposes, it’s a good idea to consult a tax accountant or financial adviser to find out how it could benefit your business.

The Savings Lesson

Having a balloon on your car loan will not save you money, because you will have to pay a higher amount of interest across the life of the loan. However, it will provide you with the great flexibility of lower monthly repayments. Remember though that while it will help you save on your outgoing expenses during the term of the loan, there’s a lump sum that needs to be paid at the end of the loan. Make sure to shop around for a low interest rate before making a purchase decision and calculate your possible monthly repayments in advance using a car loan repayment calculator. 

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5 things to consider before refinancing your car loan

Whether it’s to secure a lower interest rate, add flexibility or consolidate debts, refinancing your car loan (switching from one loan to another) can be a useful step to take.

But as with refinancing a home loan, car loan refinancing does not suit every borrower. Here are five things you should consider before refinancing your car loan.

Car value

Before refinancing your car loan, it’s important to consider the value of your vehicle. Typically, this will not be the amount you paid for it. Cars are one of those purchases which generally lose value (depreciate) over time. If you owe more money to the lender than what your car is currently worth, you would likely be considered a higher lending ‘risk’ and might discover it difficult to find someone willing to refinance your loan. This is because if you defaulted on a payment and your lender had to seize your car and sell it, they probably wouldn’t get the full amount back that you owed them. So to ensure that you have a good chance of refinancing, have a good idea of what your car is currently worth and make sure it is more than what you currently owe.

Remaining Term left on your Loan

Car loan terms are almost always significantly shorter than home loan terms, with typical loan periods between one to seven years. You should look at your current loan length and decide if it’s worth the time, effort and potential cost of refinancing.  For example, if you only had a year left on your car loan, refinancing could end up costing you more in fees than if you were to complete the final year of payments.

In contrast to that, if you still had five years to go of a seven-year term and don’t believe you’re getting the best interest rate, it might be an idea to consider refinancing.

Get Across the ‘Change’ Costs

This goes hand in hand with your loan length and is a critical thing to consider before refinancing your car loan. Some of the costs involved in refinancing can include exit fees, valuation fees, application fees and break fees. For people who don’t have long left on their term, these types of costs could mean that they end up paying more in fees than what they will save by switching to a better interest rate.

Many lenders understand this and will from time to time make special offers to waive some of these fees, so it always pays to keep an eye on special promotions being offered in the car lending marketplace.

Case Study – Comparison of Kelly and Michelle’s car loan refinance

Both Kelly and Michelle have car loans of $30,000 over five years (with no balloon) repaying monthly at an interest rate of 6.44% p.a. Kelly has four years left on her loan whereas Michelle only has two years left on hers.

They both found a lender willing to refinance their loans at an interest rate of 5.44% p.a. (a discount of 100 basis points), with total refinancing costs coming to $90.

Kelly has done the calculations and found if she refinances her car loan and pays the $90 cost, she will still save $415 in interest over four years.

Michelle decided to refinance her car loan without investigating the change costs and found later that because she only had two years left on her car loan, she only saved $7 in interest over the two years after the refinancing costs of $90. For savings of only $7, Michelle may consider whether the time and effort she put in to change the loan over to the new provider was actually worth it.

Looking after your Credit Score

Another thing most people don’t realise is that every application they make for credit (eg. a loan) goes onto their personal credit file and can negatively influence their individual credit score. This might mean that refinancing your car loan too often could make it difficult to receive a good value interest rate on future applications of credit in other areas such as a home loan or a personal loan.

The interest rate market

Refinancing your car loan may be a good option if you really want a lower interest rate to drive cheaper repayment options, but it is important to consider whether refinancing your car loan will help you to make on overall net saving and in turn accumulate more money in the medium to long-term.

A quick look at the rates currently on offer in the marketplace for car loans (secured by the vehicle itself) shows that there is a near 9% difference (in the raw % comparison rate) between the highest and lowest car loan interest rate, so it’s important to shop around before making a purchase decision. Don’t forget, car loan calculators can help you figure out what your monthly repayments and total interest costs will be.

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How much can you save with a home loan offset account?

An offset account is just one of the many lending features available to borrowers – but what is it and how does it save you money?

What is a home loan offset account?

An offset account is a transaction (or savings) account which is linked to your home loan.  The money in this account is “offset” against the balance of your loan, meaning you only pay interest on the difference.

For example, if Louis had a loan of $450,000 and had $50,000 in a linked offset account, he would only have to pay interest on $400,000.

As the balance in this offset account grows, the amount you save on interest also grows, which could save you money and cut the amount of time it takes you to pay off your loan.

What types of loans can offset accounts be used with?

Offset accounts can be linked to either a variable or fixed rate home loan, with some lenders requiring an offset account for a portion of a fixed term.

While there are different variants of offset accounts available, by far and away the most common is the 100% balance offset account. As used in the Louis example above, the total offset account balance is subtracted from the outstanding loan balance before interest is calculated. Because of the ‘saving’ nature of a 100% offset account, the balance in the offset account doesn’t earn any interest (eg. this would effectively be ‘double-dipping’).

How much can you really save with an offset account?

To accumulate the most savings, the amount of money sitting in the offset account must be consistently at a reasonable level (eg.$100 isn’t going to do it for you!).

One of the ways that people manage to maximise the amount in their offset accounts is by putting all of their work income into their offset account and using a credit card for their expenses/purchases made throughout the month. Critically, they then make a lump sum payment from the offset account once a month at the time ‘due’ from their credit card provider to balance the credit card back to $0 (and hence avoiding any interest charges and fees from the credit card itself).

As with many financial product features, there are often certain types of fees and premiums involved. And while saving money long term is the focus here, you have to make sure you do the basic sums to ensure that the fees don’t end up costing you more than the amount you save by reducing the interest bill on your home loan!

Some of the common fees and premiums involved with offset accounts can include:

  • standard transaction fees
  • application/establishment fees
  • higher monthly account keeping fees
  • higher interest rates

Offset Account Case Study: Louis borrows $450,000 and decides to go with a 100% offset account loan which costs him nothing extra in fees, but attracts an interest rate premium of 0.1% p.a higher than the same loan without the offset account. At the end of the first year of his loan (which has a 3.9%p.a interest rate), he has managed to maintain $25,000 on average in his offset account across the entire year. The saving Louis makes from the offset account (eg. $25,000 multiplied by 3.9% =  $975) exceeds the extra he’s had to pay from the 0.1% p.a premium on the interest rate (eg. $450,000 multiplied by 0.1% = $450). So in effect, he is $525 better off.

For some people, the benefits of a slightly lower home loan interest rate and the possibility of a reduced loan term outweigh the costs of maintaining an offset account. However, for many others who are able to consistently maintain a reasonable balance in the offset account, they can make a meaningful saving. At the end of the day, it depends on your personal financial situation.

The Savings Tip

  • Offset accounts can be a great way to save money by reducing the interest you pay on your home loan.
  • BUT you must maintain a reasonable amount of money in the offset for it to make a difference.
  • The overall saving of an offset account is the interest savings over the loan term, minus:
    • any extra costs of an offset account (eg. higher home loan interest rate); and
    • how much you’d have earned by placing the offset money in a high-interest savings account instead.
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5 Ways to Maximise your Term Deposit Earnings

If you are looking at the low-risk option of depositing money with a financial institution, a term deposit (TD) can be a good way of getting the most out of your money from a relatively higher rate of return than a standard savings account. As with other investment products, the rates on offer from term deposits will fluctuate with the market, but there are always things you can do to make term deposits work better for you and your money.

Here are five such measures you could take.

1. Pick the right term

When taking out a term deposit, it is important to think about the tenure, or length of your investment. The ideal tenure will depend upon how long you want to put your money away for and what rates the different ADI’s are offering for different tenures. Terms generally range from one month up to five years. There are a couple of things to consider when deciding on an appropriate term length.

The first is fluctuating interest rates. For example, if you lock in a six-month term deposit and interest rates go up, you’re potentially worse off than if you were to lock in a three-month term initially and then lock in a second three-month term at the new higher interest rate. The same applies to when interest rates are going down, except that the opposite logic applies here in that the longer term you go with for your term deposit, the better the outcome if rates go down during the period of your term.

Another thing to consider when deciding on how long you should lock your money away for is when you’ll need to access to it. Accessing money from a term deposit before it’s matured can incur penalty fees which can eat into the money you are going to earn from your term deposit. Surprises are always going to happen, but you can reduce the risk of having to sacrifice a chunk of your term deposit earnings by simply thinking through your upcoming money needs carefully and making sure that you do not have any upcoming commitments that are going to require access to the funds you are looking to invest in your term deposit.

2. Understand the ‘frequency’ of interest payments

A critical step before investing in a term deposit is understanding when the interest ‘earned’ is paid. Some term deposits only pay interest once at the end of the term while some pay monthly, quarterly, or even weekly (‘compounding’ over the course of the deposit).

Some term deposits also let you take the interest earned as a ‘payment’ into a separate account – while some simply add the interest earned onto the principal amount you invested – thus adding the compound effect.

If you choose to take the interest earning payment option, it can be accessed as soon as the payments are made into the separate account, sort of like a monthly ‘income’. This option is generally not offered on shorter-term deposits (between 1 and 3 months).

3. Zero risk

Something you may not know is that all authorised deposit-taking institutions (ADIs) are guaranteed by the Commonwealth Government up to $250,000. This means that if your financial institution goes bankrupt or anything happens during your fixed term,  the Australian Government will guarantee your term deposit. So investing in a term deposit with an ADI for less than $250,000 is effectively a zero risk investment.

If you are planning on investing more than $250,000 and you want to retain the protection of the government guarantee, you can still achieve the same zero risk outcome by breaking up your money into smaller sums of less than $250,000. Importantly, in order to fall under the guarantee, the smaller deposits must then be invested at different financial institutions.

4. Interest rate pricing

There is more to how ADIs price their interest rates than you might think.

As mentioned above, interest rates fluctuate with the market. While (at the time of writing) there hasn’t been any movement in the Reserve Bank of Australia (RBA) cash rate since August 2016, term deposit rates have actually moved around a bit during that period showing that for many ADI’s, the RBA’s cash rate is not the only factor which drives their term deposit ‘pricing’. Other factors, such as the level of market competition among these ADIs for term deposit business, can also drive term deposit interest rates up so it’s important to be aware of some of the things that could influence interest rates in the future.

5. Shop around

Last but not least, the easiest way to maximise your term deposit earnings is to shop around.  Different ADIs offer different interest rates with some offering promotional rates for new customers (much like what you often see in the high-interest savings account market). Even outside of any special promotions, a quick look at a large cross-section of rates available in the market (for a 6 month term deposit with interest paid at the maturity of the term) revealed a more than 1.2% difference in raw advertised rate from the highest to the lowest interest rate on offer! This is a lot given that most term deposits are pricing under 3% p.a. Do your research and make sure you read the Product Disclosure Statement (PDS) before making any financial decisions.

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Pros and Cons of Refinancing your Home Loan

Many borrowers are not even aware of what their current rate of interest is on their home loan, let alone whether it is competitive to what’s available in the market. But before you consider whether you should test the market, it is critical to know the ins and outs of refinancing your home loan to another lender.

Thanks to the internet, it is now easier than ever for people to shop around for a good deal on their home loan. Unlike the ‘olden days’ when it seemed like borrowers were stuck with one lender for their entire loan term, it is now very common for people to refinance their mortgage with a different bank or lender.

What is refinancing?

Refinancing is a term used to describe the changeover of a mortgage to a different organisation or account. It is often done when there are appealing benefits such as a lower interest rate, more flexible loan terms or debt consolidation requirements.

There are two main types of home loan refinance:

  • When you move your loan to another financial lender, it is called an external refinance.
  • When you refinance your home loan with your existing lender, it’s known as an internal refinance.

Like any financial product, refinancing does not suit every borrower. We have compiled a list of some of the pros and cons involved in refinancing your home loan.

Pros and cons of home loan refinancing

Pros:

  1. Interest rate: one of the main reasons that people refinance is because they want a lower interest rate. Having a lower rate can not only reduce your monthly repayments, but potentially help you pay your loan off sooner and boost your savings long term.
  2. Equity Access: when you refinance your home loan, you will have access to any equity you have paid over the course of your mortgage. If you choose, this could be used for things like re-investing, renovations, taking a holiday, purchasing a new car and much more. However, before you go spending too much of your equity, it’s important to remember that the more equity you have, the better chance you have of getting the very best interest rate you can achieve from your new lender.
  3. Flexibility: when you refinance your home loan, you can lengthen or shorten the loan term (i.e. how many years it takes to pay off the loan) to suit your needs. By increasing your loan term, you can reduce your regular payments over a longer period of time. In comparison, by decreasing your loan term, you may increase your payments but pay less interest overall (by paying off the loan quicker).

Cons:

  1. Fees: It’s important to do your research before you consider refinancing as there can be a number of fees involved. A few of these include exit fees, valuation fees, application fees, and break fees.
  2. LMI: If your equity is less than 20% of the property value, your lender may require you to take out Lenders Mortgage Insurance (LMI). This protects the lender if you default on your home loan, but could end up putting you seriously out of pocket.
  3. Credit Score: Most people don’t realise that every application for credit goes into their personal credit file. Refinancing your home loan often could impact your credit score which can make it difficult to receive lower interest rates for future applications.

It’s never too early

If you’re thinking about refinancing but have only just taken out a mortgage, it is still possible for you to do so. In fact, anecdotal evidence coming out of our sister company Loans.com.au’s lending specialist team suggests that it is not uncommon at all for people to refinance their home loans within 3 months of buying their property! This makes sense if you think about it. Buying a home for most people really focuses on just that – the home or property. Very rarely does it involve spending more time (than looking for the right home) on finding the right home loan!

Ultimately, refinancing is not going to suit every person in every situation. It is important to look at your individual circumstances and weighing up all of the pros and cons before making a move to do so.

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