Get your home loan under control
OPINION: Do you have a solid financial plan in place to create, protect and grow your wealth? What if something unexpected occurred? What would happen to you and your family?
Welcome to Rival Wealth's third series examining the nine fundamental steps we believe you need to take to achieve financial health.
So join me and our three new fictitious case studies each fortnight and get yourself sorted. Step two is lending and home loans.
Renee is determined to own her own home within two years. Her goal is to purchase a house in Palmerston North valued at $260,000 or less. Currently she pays $300 a week in rent, an amount which she finds manageable. Ideally she would like her home loan repayments to work out to a similar weekly amount over a 25-year term or less.
Renee was delighted to discover she's eligible to apply for a Welcome Home Loan package. This means she only needs a 10 per cent deposit of the purchase price rather than the standard 20 per cent. If she meets the lending criteria of her bank, she'll be on track to meet her goal.
Renee is also fortunate to have joined KiwiSaver five years ago, and because her income is under $85,000, she can also apply for a KiwiSaver HomeStart grant. Subject to meeting certain conditions, she should be able to withdraw her current balance of $15,000. The HomeStart grant will give Renee another $1,000 per year she has been contributing which means she now has $20,000 towards her 10 per cent deposit.
All Renee needs to do now is to focus on her savings plan and reduce any unnecessary spending. She'll be looking at open homes before she knows it.
Top tip: Remember, the larger the deposit – the less you need to borrow. Don't borrow the maximum home loan amount just because your bank will lend it to you.
Warren and Judith
Although they currently enjoy a very good standard of living, Warren and Judith have no idea how much they actually spend each week.
If they want their retirement to be as comfortable as their working lives, they're going to have to knuckle down and sort out their finances.
Planning is key. To really retire is to be debt-free so their priority should be to repay their home loan within five years. Although interest rates could fluctuate, they should commit to having this debt gone –they have the income. They could even look at fixing the interest rate on their mortgage for this period so they know exactly what they'll need to pay each week.
Next step is to reduce their ad hoc spending. They need to work out a budget and stick to it. Their dependent daughter will finish university at the end of the year. This extra income should be directed towards their home loan to pay it off even faster.
Top tip: Structure your home loan so it aligns with your financial goals. Trying to constantly seek the lowest interest rate may not always be the right solution for your situation.
Darryl and Christine
Darryl and Christine are big spenders but can't afford to be. They need to seriously rein in the credit cards to get themselves financially fit.
They now have a detailed budget and are shocked to see how much money they've been spending, and quite frankly wasting. They've talked about adding the debt to their existing home loan, but this is not a good idea.
Their current home loan is being repaid over a 30-year period. Repaying their $32,000 credit card debt over 30 years would cost a staggering $25,000 in interest.
Instead they've managed to offload their credit card debt to another bank offering an interest-free transfer. Their austere new budget will allow them to repay $120 a week and in a year's time they should either transfer the balance to another interest-free or reduced-rate period if available.
Alternatively, if they have enough equity, they could transfer the balance to a separate home loan using home loan rates but repay the loan over a four-year period.
Once this debt is gone, Darryl and Christine should start increasing their repayments to reduce the term of their main home loan.
Top tip: Don't just pay the minimum payment off credit cards. Ideally, the best way to utilise a credit card is to repay the closing balance in full each month.
* Direct questions to Tim Fairbrother www.rivalwealth.co.nz 0800 4 RIVAL (0800 474 825) This information is of a general nature and is the opinion of this authorised financial adviser. This is not intended to be personalised financial advice. A disclosure statement is available on request and free of charge.