| Owner News |
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| Equity
Talk: More than just a home loan |
| Refinancing
can be a good idea for homeowners who want to build up equity more quickly
by converting to a loan with a shorter term or who want to draw on the equity
built up in their house to provide for an investment. The idea is to work
harder to be free of debt sooner |
| A
general rule is that refinancing only becomes worth your while if the current
interest rate on your mortgage is at least two percent higher than the prevailing
market rate. This figure is generally accepted as the margin of balancing
the costs of refinancing a mortgage against the savings.
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| The
second general rule, given the high costs of refinancing, is that it takes
at least three years to fully achieve the savings from a lower interest
rate. |
| Another
important innovation by lenders in the past few years, which can also impact
on your property equity, are the various Offset and Redraw style loans.
These make use of your income to cut interest payments on your loan, by
using it as a deposit account. This style of loan can help you reduce your
total repayment period by months or even years if you are disciplined. Most
benefit is gained by depositing all available funds into your mortgage account.
You pay no tax on interest earnings because you receive no interest. Instead
of making extra repayments into your loan, you deposit these funds into
your loan account. With many accounts you also retain access to all your
funds, (though the redraw availability of funds differ from lender to lender).
Without this feature your interest would normally be paid into a traditional
every day account, and you'd pay tax on it. However, with offset style loans,
the interest savings reduces the length of your loan. Clearly though you
need to be careful both in terms of what interest rates are actually offered,
and that you don't redraw too much from your loan. This can impact negatively
on your property equity, and it may actually take longer to pay off your
loan. |
| In
fact this goes as general advice for all these 'more than a basic home loan'
style mortgages. The bottom line is always what offers the best value for
money. So look closely at the interest rates and charges of whatever style
loan you sign up for. Also, be realistic about your spending habits. For
most of us, a basic home loan still remains one of the best ways of enforcing
savings. We usually find it easier to meet regular payments than to control
our spending! The problem with equity style loans is that they allow us
to reduce equity. Building equity in your own home is long hard process,
and is the only way you will eventually be free of the burden of debt. |
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