Finance advice

Is it worth taking a loan with a higher interest rate?

By Victor Kumar

One of the biggest mistakes I see new investors make is being too fixated on interest rates. Plus, they often forget that interest rates are always relative to what is happening economically at that point in time.

If we look back at the GFC, for example, interest rates were sitting between 6 and 8 per cent and yields were between 8 and 9 per cent in the mortgage belt areas.

Fast forward 10 years and now interest rates are about five per cent and yields are sitting at about 3 per cent, which is a huge turnaround.

The thing is, the differential between yields and interest rates has always been between one to three percentage points in these mortgage-belt areas. So, the only thing that has really changed is the dollar amount that you’re paying for a property.

Back then, we were paying $180,000 to $200,000 for a unit, but we’re now paying $350,000 in Sydney’s South West. A decade ago, in 2008, we were paying $250,000 to $350,000 for a house but now it’s $600,000.

So, the fundamentals haven’t really changed if we look at these figures apart from the entry cost.

Rate reality

It was only about three or four years ago that if you had a 4.99 per cent interest rate you were doing high-fives. However, now some buyers and investors are saying that an interest rate of 5 per cent is “expensive”.

People have clearly forgotten that the average interest rate has always been around 6 per cent!

The fact is that banks qualify potential borrowers at a much higher rate, meaning that they are factoring in an increase of 1–2 percentage points at some point in time, to ensure people can still service the loan in the future.

Like I said, the problem is that too many people are focused on the interest rate. They’re aiming to achieve the lowest rate from one of the big lenders, which in today’s environment takes the most time.

Generally, in the past, loan approvals could be achieved in about a week from one of the Big Four banks. Today, that timeframe has ballooned out to three weeks because of the additional checks and balances required.

In the meantime, investors are at risk of losing the deal altogether because of the delays in securing finance.

And that’s why savvy investors consider loans with higher interest rates and shorter approval timeframes because they don’t want to miss out on opportunities. Plus, they know that they can always refinance in the future once the property is part of their portfolio.

Rate folly

Chasing a cheaper interest rate when lending conditions are tough means you will be racing to get the loan approved even within 21 days, plus the vendor might opt to not grant you a time extension, if the loan isn’t approved.

Second-tier lenders, on the other hand, are generally not constrained to the same degree and often require less paperwork, which results in a faster processing time.

Of course, the trade-off is a higher interest rate, but we need to keep this in perspective. The rate differential is often just 0.5 to one percentage point higher, which is just $2,000 to $4,000 annually on a $400,000 loan.

Plus, you are usually able to get a loan much faster, which means that you don’t miss out on opportunities.

I regularly use this strategy and within a year, or so, refinance via the same lender or even a new one if they don’t come to the party, to a much cheaper rate. Obviously, I have taken into account exit and entry fees for the loans.

I’ve usually also completed a cosmetic renovation, so I’ve achieved a value uplift which is much greater that the higher interest rate has cost me over that timeframe. The key, of course, is to not get fixated on interest rates, within reason.

What matters in the long run is growing your portfolio when you can and using whichever lender – either big and small – that will enable you to make that happen.

At the end of the day, capital growth over time will always be superior to a short-term period of paying higher interest rates.

If you miss out on deals because you think low interest rates are more important than what they truly are, then your portfolio – and your wealth – will likely suffer in the long run.

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About the Blogger

Victor Kumar

Victor Kumar

Nearly 15 years ago Victor and his wife came to Australia from Fiji with just $4,500 in their pockets. They worked hard as radiographers but realised this was not the way to prosperity. Victor embarked on a process of building wealth through property. He has amassed a substantial property portfolio, and is still actively buying and renovating property. His recommendations are based on what works in today’s market, not what used to be effective a year or more ago.

Victor’s experience, finance background, and financial planning qualifications mean he is well equipped to negotiate with banks – helping them find ways to say “Yes”. He has also invested significant time and money in learning from other property investment experts and knows how to make a portfolio work.

Of course, Victor has made a few mistakes along the way but these have made him wiser – and he’ll let you learn from his mistakes so you don’t need to make them. His goal is to help you achieve your financial goals by sharing his extensive knowledge about financial structures and investment property.

Victor is now sought after as a keynote speaker at several property investment seminars and is acknowledged by his peers as an expert in the industry.

http://www.rightpropertygroup.com.au/

FROM THE WEB

podcast

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Promoted by Blue Ink Finance.

Budgeting tips when your Personal Debt is High.

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Credit card debts and personal loans are the greatest obstacle between everyday people and their potential to live in financial freedom.

Of course, I understand that sometimes getting a small personal loan is absolutely necessary. Unexpected costs like medical expenses can make personal loans the only option.

However, the majority of us have debt simply because we spend more than we earn.

In either case, your number one priority is unlocking those chains of debt that are holding you back.

I’m going to give you some tips for budgeting with hefty personal debt, but first I want to talk about the impact those loans are having on your life.

How much is your debt really costing you?

Over the years that you’re paying off your loans at the minimum repayment, the interest on those items will end up costing you multiple times more than the original borrowed amount - and those endless due dates will haunt you. There’s no freedom in that!

Let me give you an example. You’ll be shocked, I guarantee it!

Let’s say you have around $4,000 of credit card debt, charged at 19.99% p.a. If you paid only the minimum monthly amount, it would take 37 years to pay off the total debt.

How much will that $4,000 debt cost you? $19,200. Depressing, isn’t it?

You might feel like you need a full-blown money explosion to get out of debt, but don’t despair just yet.

What you need to do is arm yourself with a strategic budget, and I’ve got some tips to help you.

Budgeting while you have hefty personal debt is tough, but possible – and it’s essential for eliminating that debt forever. Let’s have a quick look at how you can start to tackle that mountain of borrowed money.

It’s time to take charge and break some chains!

There’s a method for reducing debt that has an excellent success rate, if you’re committed:

  1. Make a realistic budget (and stick to it)
  2. Reduce your expenses and/or increase your income until you are in the black
  3. Save an emergency fund first
  4. Pay off your personal loans and credit cards, starting with the either the smallest debt first or the debt with the highest interest rate
  5. Revise your budget as you go along.

Why an emergency fund is paramount to success

You’ll see I’ve put saving an emergency fund before paying off your loans. Even a small amount initially, like $500, is enough to stop the cycle of borrowing to pay bills, then paying out even more in interest each month, which leaves less in the bank to pay the next bill.

Once you have a buffer saved, then you can start aiming some serious firepower on your debt, and that’s when it gets exciting!

Think back to my credit card example. If you upped the payments each month from $84 per month to $212, you would have the card paid off in two years and save $14,285 in interest. That’s worth a little bit of effort, wouldn’t you agree?

Tips for a budget that works

You may need to cut back drastically on your expenses to clear your debt, but here’s some other ways to make the most of your budget:

  • Find micro-ways to reduce your expenses every day. Make work lunches at home, cancel a pay TV subscription, find a better phone deal, or pass on your afternoon chocolate bar from the vending machine. Instead of spending $40 on a takeaway dinner, have a bowl of cereal!

  • Find a friend who will keep you accountable. Having someone else who shuns a pricey outing to the day spa for a walk along the beach instead will make you feel better about saying ‘no’ to expensive events that will blow the budget.

  • Refinance your home loan to release some funds. If you have a mortgage, talk to us at Blue Ink Finance about the possibility of refinancing your home loan to allow you to release some equity to help clear your high interest, personal debt. It’s not always the best strategy, but it’s worth investigating, especially if you can consolidate it into a home loan that has a significantly lower interest rate.

  • If your income increases, leverage it! The only place that extra money should go is into paying off more debt. Enough said!

  • Refine and polish your budget as your circumstances change. Your budget shouldn’t stay the same. As you find more ways to decrease your expenditure and become adept at sticking to your financial plan, fine-tune your budget to reflect your savvy saving. Any spare change goes directly onto your debt.

  • Automate payments of bills, so you don’t spend the money first. This saves you from late fees if you forget, too.

The reality is that you won’t have a profitable budget until you get rid of that high-interest debt. The beauty of a budget is that it can get you there! Knock the debt, stay away from borrowing except for assets like property, and you’ll have a well-oiled financial plan that kicks goals instead of paying lenders!

At Blue Ink Finance, we have a team of expert brokers as well as a panel of industry experts that understand all the nuances of positioning your personal finances to kick real goals with Property Assets and can support you in achieving your goals.

Give the team at Blue Ink Finance a call on 1300 888 796 or click here to request your Complimentary Finance Review with one of our experienced Finance Coaches now.

And see how having a panel of industry experts on your side, can fast track your property goals.

About The Author

David Wegener
Chief Executive Officer
Blue Ink Finance

Who I am, and why I want to help you succeed.

As an award-winning Mortgage Broker with nearly 20 years’ experience in the finance industry, I’ve seen it all.

I’ve gone through constant industry changes and yet I still successfully help my customers borrow the money they need to get ahead.

As a Finance Coach, my goal is to help you understand your financial potential so that you can borrow with confidence.

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Leveraging your Blue Ink Finance Broker for more than just a loan.
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With the softening market impacting property values in many parts of Australia, Sally Dale, Opteon state director for NSW, ACT and Qld joins us to discuss the importance of valuations in the current property market

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Joining host Phil Tarrant, Sally will draw on her 25 years of experience in valuation and discuss the processes involved in arriving at a value for a particular property. She will also share how that process differs between commercial and residential properties and the difficulties which regional property valuations can present.

Sally will unpack the importance and cost of regular valuations on your properties, discuss whether presentation and owner input can sway a valuation and share what you should look for when seeking a reputable property valuer.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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AREAS MENTIONED: 

Sydney
Brisbane
Adelaide

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Can property presentation result in a higher valuation?
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A softening market can be a difficult time for a property investor with finance approval tightening and property capital growth slowing, and while many real estate agents are also feeling the squeeze McGrath Brighton Le Sands' Bill Tsounias claims it is simply the market returning to normal.

" ["fulltext"]=> string(2834) "

In this episode of the Smart Property Investment Show, Bill joins host Phil Tarrant to share his thoughts on the current Sydney property market, and to share the shifts that he has seen in house and unit sale prices following their worst quarter in the past decade.

Bill will unpack why properties are spending longer on market, share what he believes property investors are doing wrong when trying to sell their properties and share the secrets to getting the best out of a real estate agent and an auction in the current softening market.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

Why I still buy in Sydney
Property market update: Sydney, July 2018
Sydney rental market slowing, latest research finds

AREAS MENTIONED:

Revesby
South Hurstville
Sans Souci
Strathfield

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Top 100 ranked agent Bill Tsounias shares the secrets to getting the best deal in a softening market

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