- 3 Aug, 2018

How to Optimise Your Loan Structure

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When it comes to managing money well as an investor, you need to be perceptive and look out for opportunities that could enable you to save more. Having the correct loan structure based on your needs reduces your costs, and lessens your overall risk. Let’s look at how tidying up financial loose-ends and selecting the right loan type and features are important aspects of structuring your loan.

Tidying Up Financial Loose-Ends

As an investor, you will come across many financing options that will either help with your loan structure or will make it more difficult. Some options will enable you to maximise your capital, while others will erode it. So, how do you avoid costly mistakes? One of the most important considerations you’ll make is selecting a loan type and features. But, before doing this, you also need to tidy up any financial loose-ends.

Account consolidation

Most investors will find themselves with multiple bank accounts as these link to their investment properties. Sometimes this will work in their favour, especially if they don’t want all their investment eggs in the one financial basket. But usually, when these accounts are with different lenders, they cost more. Why? Well, most banks offer package deals. These packages put all your everyday banking needs in the one place, simplifying account management and reduce the time needed to balance these accounts. Plus, you can take advantage of discounts and other offers.

What are the benefits of a banking package?

  • Simplifies your banking.
  • Reduces annual fees.
  • Gives you discounts on home lending.
  • Lessens the cost of insurance.
  • Cuts annual credit card fees.

Direct Debit

One of the easiest ways to pay your mortgage is via direct debit. Therefore, if your lender hasn’t set this up, then it’s time to ask. Once setup, it’s then important to check the repayment is correct and coming out of the right account. Just remember that lenders don’t always get everything right.

Why is a direct debit of benefit?

  • Simplifies the repayment process.
  • Maximises time and effort.
  • Cuts down stress.
  • Prevents payment default.

Increase Payment Frequency

As crazy as it sounds, paying the same amount off your loan, but more often, will reduce your interest. How come? Well, paying more often reduces your principal faster. Also, you’ll make an extra month’s repayment as there are 52 weeks in a year or 13 lots of 4-weeks.

How can I reduce my interest?

  • Pay weekly or fortnightly.
  • Slightly increase your repayments.

Now that we’ve covered tidying up those financial loose-ends let’s look at loan types and features.

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Selecting the Right Loan Type

There are many loan types available – principal and interest, interest-only, fixed, or variable rates are four of the most common. Finding the right loan type for you so structuring your loan is effortless is as simple as weighing up the pros and cons, and then considering these loan types in terms of your situation.

What are the pros of a principal and interest loan?

  • The loan repayment begins on the first day.
  • Loan interest over the term is less, as you’re paying off the principal.
  • Borrowing power is higher.
  • Interest rates are often lower.

How can a principal and interest loan disadvantage me?

  • Redraw amounts decrease with the loan size.
  • Repayments are higher.
  • Reduced cash flow can make this loan type unsuitable for investment.

What are the advantages of an interest-only loan?

  • Lower monthly repayments short-term.
  • Higher tax benefits are short-term.
  • Free-up cash to invest elsewhere.

What cons do interest-only loans have?

  • Tighter lending criteria.
  • Higher interest rates.
  • Not all lenders offer interest-only loans.
  • Interest-only terms are not for the full loan term – 3, 5 and 10-years.

What are the pros of a fixed loan?

  • Rates don’t change for the specified term.
  • Repayments are easier to manage.
  • Budgeting becomes easier.

How can a fixed loan disadvantage me?

  • Limits apply to extra repayments.
  • Extra home loan features such as a redraw and offset are not available.
  • Falls in interest rates won’t apply to you.
  • Break fees may result if you sell your home.

What are the advantages of a variable loan?

  • Making extra repayments is easy.
  • More home loan features are available.
  • Switching loans is easier.
  • Greater loan flexibility.

What cons does a variable loan have?

  • Interest rates can change.
  • Repayments fluctuate with the market.
  • Makes budgeting harder.
  • Increases mortgage stress.

To work out which loan type is right for you, crunch the numbers. Many investment experts suggest taking out a variable interest-only loan to maximise tax benefits and increase cash flow. But, you need to work out how much this strategy will cost you compared to taking out a principal and interest variable or fixed loan.

Are you looking to purchase a property or refinance?

Selecting Additional Home Loan Features

You should also consider the following features when structuring your loan. You may be able to reduce your interest repayments even further.

100% Offset Maximisation

Linking your everyday bank account to an offset account reduces your interest. All you need to do is ask your lender to set it up.

How does an offset account work?

  • Deposit all your income into your offset account.
  • The loan principal reduces by the amount held in the offset account.
  • Interest is payable only on the principal, less your account balance.

Redraw Setup

A redraw facility allows you to make extra loan repayments. This money keeps in trust. So, if you need it, you can withdraw it.

How does a redraw help me?

  • Make extra payments when money is available.
  • Your loan principal reduces, and you pay less interest.
  • Withdrawal is available if needed.

Whether you are a first home buyer, refinancer or property investor, it’s important to have the correct loan structure. Contact eChoice and speak to a qualified mortgage broker who can help you achieve the correct loan structure for your property purchase. Our brokers have access to 100’s of products, so we can help you find a competitive mortgage to meet your individual needs.

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