Do you know what the interest rate is on your home loan? How does it compare with what the big banks are offering? If you can’t answer either of these questions then you’re guilty of one of the biggest money mistakes – not looking around for the best deal.
It’s now easier than ever to change home loans and even your regular banking accounts. So shop around for the best interest rate and refinance if necessary.
One of the best rates on offer is UBank’s 5.62 per cent, which includes a 0.2 percentage point lifetime loyalty discount (your rate will always be that much lower than the UHomeLoan standard variable rate), although this offer is only for refinancing.
The next best offer is 5.65 per cent, which is still much better than the most competitive of the four majors at 6.1 per cent (see Yields, page 76).
The difference between 5.65 per cent and 6.1 per cent on a $500,000, 20-year home loan is $30,990 – that’s what you’ll save with the cheaper interest rate over the life of the loan.
What’s more, if you were to maintain the same monthly repayments on the 5.65 per cent loan as you were paying on the 6.1 per cent loan – that is, $3611 – you’d pay the loan back one year and three months earlier and save a further $24,351 in the process.
2. NOT REDUCING NON-DEDUCTIBLE DEBT
The minute your bank cuts interest rates you’re on the phone reducing your monthly home loan payment. You pay the bare minimum and your loan is for 30 years – hell, you’d spread it over 40 years if the bank would let you.
If this sounds like you then you’d better get used to being in debt because this kind of attitude will never get you out of it.
Non-deductible debt is debt that isn’t used to generate income – essentially, the debt on your home loan.
The sooner you pay off this sort of debt the better. You should be doing everything you can to reduce it or, even better, make it disappear.
Did you know that on a $300,000 home loan with a term of 20 years if your rate dropped from 6.5 per cent to 6 per cent but you kept the repayments at the previous level you’d save about $17,000 in interest and pay your loan off one year and five months earlier?
You should also be using a 100 per cent offset account to park all your spare cash. Any money in this account comes off the balance of your home loan for interest calculations.
If you’re clever – and we know you will be once you stop making all these silly money mistakes – you can have your pay go into your offset account, reducing your interest liability.
Meanwhile you use your credit card (one with a long interest-free period) to live off during the month, clearing it when your next pay goes in.
3. RUNNING UP CREDIT CARD DEBT
Credit cards can be very useful, and not just when using them as a cash flow tool in conjunction with an offset account (see previous item). But the key is to pay back the entire balance every month.
You certainly need to pay more than the absolute minimum.
On a credit card balance of $3000, at a low rate of 10.8 per cent and with a $200 annual fee, making the minimum required repayment of $80 would mean you’d take five years and six months to clear the debt – at the cost of $1007 in interest.
If you need to get that ballooning credit card debt under control, consider a balance transfer card.
If you transferred that $3000 debt to a card offering a balance transfer rate of 1.9 per cent for 12 months and started paying back $300 a month instead of the bare minimum, you’d clear the debt in a year and incur just $30 in interest.
Be aware, though, that any additional purchases during that period will not only add to your debt but will probably be charged at the card’s purchase rate, which could be more than 20 per cent.
Once you’ve managed to pay off the transferred debt, be diligent about paying off your balance each month before the end of the interest-free period, or switch again, this time to a card with a much lower ongoing rate.
Don’t become stuck because of the apathy we talked about above. If the banks put a dollar value on what they gain from customer’s inertia it would be in the billions.
4. KEEPING IT ALL IN CASH
Yes we know times are volatile and it’s hard to know what to do with your money, so cash can seem like the safest option.
This is particularly so if you’re approaching retirement. But the rules of diversification apply to all asset classes and cash is not exempt.
If all your money is sitting in cash, it’s highly unlikely you’ll be able to get back into the market in time to take advantage of any upswing.
We don’t want to repeat the self-interested mantra of the fund manager or broker who, of course, wants you to invest in anything other than cash so they can get a clip on the way through.
But there are some distinct advantages to investing in blue-chip shares, or other investments, that pay fully franked dividends.
And, we’re sorry, but equities usually outperform over the long term.
Consider the following numbers: Between 1980 and 2011 the average annual return on Australian equities was 13.7 per cent; for Australian bonds it was 10.3 per cent; on international shares (unhedged) it was 11.7 per cent; and for cash it was 8.7 per cent.
Of course shares carry the greatest risk. But while they underperformed by 38.9 per cent at the worst point in that period, there was also a year when they outperformed by 66.8 per cent.
5. FORGETTING TO REMEMBER RETIREMENT
Superannuation may seem like a dull topic that you don’t need to worry about right now, but if you want to spend your retirement living in the manner to which you’ve become accustomed you’ll have to start salary sacrificing.
If you’re single, 45, earn $80,000, have $80,000 in super, and you plan to retire when you’re 60, you’ll be looking forward to an annual retirement income of $23,281 – only marginally above the age pension of about $20,000.
If your partner is 42 and on a similar income but with a higher superannuation balance of $115,000, you’ll be looking forward to a combined annual income in retirement of $44,256 until you’re 90, when it drops down to the pension again.
If you want to boost that amount to a combined $62,000 a year until age 90 you need to find an extra $1000 between the two of you each fortnight.
Of course the secret to achieving an income that’s closer to your combined incomes at retirement is to start early.
If you and your partner started making voluntary contributions when you were much younger – say $500 fortnightly between you, from when you were 25 and 22 and earning just $60,000 and $50,000 respectively – you’d end up with an estimated annual combined income at 60 of $64,634.
If you worked an extra five years, retiring at 65, your income would rise to $84,589.
6. NOT BUDGETING – ITBS
It’s not a sexy acronym like KISS but it’s one we like, although it took us a while to work it out too: it’s the budget, stupid.
If you don’t have a budget, start one now.
Begin with the basics: record your spending for at least a week – though a month will give you a better idea – and then build your budget around that.
Add 10 per cent to everything for good measure; a budget is only depressing if you can never meet it.
Writing down everything you spend can make you much more conscious of what you’ve been doing with your cash.
A coffee and cupcake at 3pm may seem a small thing at $7, but over the working week that’s $35, or about $1700 a year (assuming you take holidays from the office and your cupcake).
We won’t bore you with more calculations about the impact if you put that money on your home loan instead. Suffice to say you’d save. A lot.
A budget also helps you set and then track goals.
It may help you realise that paying off your home loan in 10 years rather than 20 is actually achievable, and it will give you the tools to do that.
ASIC’s consumer page, www.moneysmart.gov.au, has a handy reckoner for creating your own budget. It also has a suite of other tools that will help you.
7. FIXING YOUR HOME LOAN
Would you bet against the house at the casino? Yes? Well don’t read on, because we really can’t help you.
But if you do realise the folly involved in such an action then you might realise why it’s rarely a good idea to fix your home loan – in effect, taking a bet with the bank on the future of interest rates.
Most people do it when interest rates are rising, scared they’ll rise more, but Smart Investor has talked to many people who fixed at 8 or 9 per cent and continued to pay those rates even as the variable rate dropped further and further.
The good news is that it’s difficult to fix for the entire duration of a loan, so there’s an end date to that kind of pain.
There are a very few times in the cycle when it may be advantageous to fix.
If you can manage to get in just before rates start to rise, perfect. But most people think about fixing when rates are rising, not when they’ve bottomed.
The difference between an 8 per cent rate and a 6.5 per cent rate on a $500,000, 20-year loan? More than $109,000 in interest over the life of the loan.
If you could continue the higher monthly payment but on a 6.5 per cent variable loan you’d pay it back three years and 10 months earlier and save more than $87,000 in interest.
8. NOT INSURING, OR UNDERINSURING
You can’t put a price on your life but if you have a family or other dependants you need to try to.
Recommendations for appropriate life cover vary, but 10 times salary or a minimum of $420,000 is one rule of thumb that’s often used.
That might seem a lot but consider the liabilities your family would have to meet if left to fend for themselves: there’s the mortgage, perhaps school fees, and even the need to generate an income if child care means the surviving partner can’t go out to work.
The Lifewise calculator, provided by the insurance industry, comes up with recommended life cover of $930,000 for a 45-year-old man on a salary of $100,000 who has two children (the youngest aged five) and a partner who isn’t working.
Round that up to $1 million and the annual premium would be $970, or $81 a month.
For income protection insurance providing a payment of $6250 a month to age 65, after a 30-day waiting period, the annual premium would be $1300, or about $108 a month.
That’s a total outlay of about $190 a month for these insurances.
In this example, we’re assuming there’s a home loan of $500,000 and a car loan of $20,000.
We’re also assuming the 45-year-old’s super fund provides $100,000 in life cover.
So while life and income cover may seem expensive at just over $2000 a year, how does that compare to the debt of $400,000 you’d be leaving your family, along with income uncertainty? If you have dependants, life insurance is a must.
Speak with one of our professional advisers today about how to avoid or correct these common money mistakes. Click here to make an appointment.
Source: Smart Investor