Although this seems like an ultimatum between the two, the truth is that you can be involved in both. This article will delve deep into both sides of the coin so that you can better delegate your funds to each one.

Paying off the mortgages

Focusing on paying off a mortgage can have its pros and cons. It’s always optimal to be aware of both. This section will give you insight on the main four factors that you will be both gaining and missing out on when paying attention to this area.

Advantages

Certain return

When most people think of paying the mortgage, it’s usually associated with clearing debt rather than making money. In fact it’s both. Every cent off the mortgage allows you to collect interest that would have been spent on the mortgage. Perhaps the best part about this is that there are limited risks, it is a guaranteed return.

Piece of mind

The main reason why people focus on mortgages rather than investing is because of a tendency to choose safety over risk. Perhaps the best benefit of paying off a mortgage is that you gain certainty that cannot be equaled in the volatile share market. Although you’re not playing to win big, you are securing your future in the sense that you won’t have an overbearing mountain of debt.

Disadvantages

Tunnel vision

Although tunnel vision may work well for athletes or anyone competing in certain industries, it does not apply to this. By focusing all your energy on paying of the mortgage, you can very often miss extremely lucrative investment opportunities that would otherwise have paid you a much higher return. Although you’re securing your financial safety, you might also be missing out on your financial freedom.

Eggs in one basket

Like the above, sometimes putting all your eggs in one basket can work. If safety and security is your priority though, this can often-times backfire when you place all your attention on your mortgage. When your capital is involved in only one asset, if anything goes wrong you have nothing to fall back on.

Splitting Funds Between Mortgages and Investing

Alternatively to the above, it is possible to use your capital for both options. Although you will be diversifying your focus, there are benefits as well as the negatives that you will come across.

Advantages

Potential for large return

The beauty of investing in things like shares is the potential for long term income that is likely to be more lucrative than what you would save in interest by paying off your mortgage. This also allows you to better pay of your home whilst having excess cash to spend.

Asset diversification

We mentioned that putting all your eggs in one basket is not always the best option when it comes to money. This is why investing alongside mortgages is phenomenal for securing a safe future. This means that if one of your assets is performing poorly, it is likely that another will balance it out.

Compound interest

If you have ever heard of the term “making money work for you”, this would be the closest thing to it. The compound interest effect of investing cannot be overstated when you give time for it to grow. This is why if you choose to go down this route, invest as soon as possible even if it’s only a dollar, so that you can begin taking advantage of this principle.

Disadvantages

Experience required

Although not much, a decent level of understanding is required if you desire to be successful in investing. This can be a negative or positive depending on your situation. If you are in the situation where you lack the experience or knowledge, either learn or find an individual who knows what he or she is doing.

Higher risk

The potential for bigger gain also comes with the potential of a large loss. The risk in investing is real and must be minimised when making decisions as to where to put your money. Factors such as unexpected market fluctuations and so on all happen regularly. A long term approach is much more ideal for minimised risk as opposed to a short term approach which rarely works out.

As you can see, both options are viable depending on your personality and circumstance. If you are someone with confidence and experience in investing, the latter will always be ideal. Alternatively if you’re not, you can always minimise the amount you put in initially compared to the mortgage so you can at least get your feet wet.

Interested in learning more about investing? Contact us today!

The fact is, to secure a mortgage loan, a lot of boxes have to be ticked, so be sure to make yourself aware of this crucial step in the house purchasing process.

Stay consistent with your job situation

Job security, as you may know, is one of the main criteria selections for lenders to decide whether they trust you or not. The absolute last thing you want to do before a mortgage loan is quit or change your working arrangement in a way that severely affects your finances.

This still applies whether you’re securing a mortgage or have a current lender. If there is any shift in your employment and income status, banks and lenders are forced to reevaluate you, which could mean trouble.

Do your research

As you become more aware of your job security, you also need to know your job situation for the industry you’re in so that you can find the best mortgage broker. You will find that many lenders and brokers have a very conditioned selection criteria, which makes it hard for individuals who are self-employed or contractors.

Ensure that when you do your research, you find a mortgage broker who is compatible with your situation.

Be clear on your credit score

For the amount of time it takes to find out what your credit score is, it is mind-boggling as to how many people never review it until the last minute. Often this lack of initiative can lead to rejection of mortgage application due to the individuals being unaware of their low score.

The simplicity of this step shouldn’t downplay its importance, ensure that you clean your credit history and handle any problems regarding it.

Don’t let lenders control your budget

Oftentimes, banks and lenders are quite generous in the fact that they will initially offer you a larger loan even if you cannot afford it.

This may seem good on the surface, but down the track, you are going to be put in a high-pressure situation, and as a result, face the consequences.

Ensure that you dictate your budget before you even ask for loans, and never be tempted to spend higher than your budget if they’re willing to lend a larger amount.

For more info

Contact us for more information and advice on your property investments.­

I’m confused – my bank teller is telling me to transfer my savings onto my mortgage but you are encouraging me to leave the money in my offset account. Isn’t the end result the same? Why am I being told something different from the bank?

Great question!

Besides the obvious answer that the banks would prefer the security of having your savings paying off the money they have lent you, most home owners understand that regardless of the approach you adopt, interest on your home loan is calculated on the same basis. Some believe the only difference between paying off your home loan account and placing your savings in an offset account is the flexibility of having easier access to your savings by having it sitting in your offset account. This flexibility of instant access however, is negated if you have a redraw facility on your loan account.

While the interest savings are the same, there may be very different tax considerations, particularly if the property is for investment purposes or going to be used as an investment in the future. Just because the loan is secured by an investment property, it does not mean that all interest payments are deductible for tax purposes if you redraw on the facility.

Your ability to claim a tax deduction for interest on the total loan is determined by the purpose of use of the borrowed funds.

By way of example… Let’s say you purchase an investment property and obtain an initial loan of $300,000. You then create savings over time of $30,000.

Redraw facility

If you paid the $30,000 off the loan balance (reducing the original loan to $270,000) then later redraw the $30,000 to buy a new car (increasing the loan back to $300,000), you would only be able to claim a deduction for interest on $270,000 as the $30,000 would be deemed to have been used to purchase the car (not a taxable item). This can create accounting nightmares at tax time.

Offset accounts

If you had, however, paid the $30,000 into the offset account, you will have obtained the interest savings by paying interest on the $270,000 balance. When you later withdraw the amount from the offset account to buy the car, the initial loan balance would have remained untouched and all interest would still be deductible as the total loan was used for the purchase of the investment property.

Maintaining flexibility on your home

This situation also applies to your home. In many instances you will sell your family home to buy a new one. If however you want to keep your family home for investment purposes at a later date and you have paid down the original loan rather than putting your savings into an offset account, you will potentially lose valuable tax deductions. As the financial impacts are the same, placing your savings into an offset account preserves your options into the unknown future. For example, if you know in advance as a first home owner that you will be upgrading your unit to a home in the future and plan on keeping the unit as an investment, it is of particular importance to protect your future tax deductibility while maintaining maximum home ownership. It all relies on the structure of your loan and future flexibility – something that most lending institution employees don’t understand. I hope that answers your question.

Mortgage holders may find themselves with mortgages that cost more than expected but there are some things you can do to ready yourself when rates rise, such as refinancing, budgeting and insurances.

Read the full article at domain.com.au

Considering refinancing? Talk to Natika at CPS Finance to consider your options.

What is an offset account?

An offset account is a type of transaction account that can be linked to your home or investment loan to save you money on interest. It is used to reduce the interest you owe on your mortgage by offsetting the credit balance of your transaction account daily against your outstanding loan balance.

How an offset account works

A customer takes out a $500,000 mortgage at 5% interest per annum over 30 years. They decide to put $50,000 in an offset account. As $50,000 is now in this account, the interest is now calculated on $450,000, rather than $500,000. This customer will therefore save $142,211 and will also reduce the loan term by 4 years and 3 months.

It is great for savers as any extra cash you have left over from your wage each month can be put into this account to help reduce your interest even further. You could even put the rent you receive from tenants into this account.

Benefit of an offset account

One major benefit of having an offset account is that it allows you to pay down your mortgage faster so you end up paying less interest in the long run, which is especially ideal on an owner occupied home. It also acts as a transactional account enabling you to deposit as well as withdraw money allowing you to have access to your savings if you require them. This can allow you to move quickly on the purchase of another property if the right deal comes along.

Disadvantages of an offset account

As well as benefits, there are also some disadvantages which you should bear in mind before proceeding. These include:

• It might have an account-keeping fee attached to it.
• It might have higher interest rates or fees compared to a basic home loan.
• A partial offset account only offsets a percentage of the balance whilst a 100% offset account will offset the full amount, but is usually only available for variable-rate loans.

Should you have an offset account?

So should a property investor use an offset account? Deciding on whether to have this type of account or not will ultimately depend on your situation. If you know you are a good saver and have a large sum of money that you can put aside then this option could be right for you. By leaving your money untouched for longer this will help lower your home loan repayments each month and the overall interest you will have to pay.

Before proceeding with an offset account it is important to seek expert independent advice first to know exactly what you can and cannot do. You should also shop around to find the best option to suit you.

Want to find out whether an offset account will work for you? Talk to CPS Finance to discuss your options.