VISIONFinance Blog...

2 Minute Home Loan Budget for First Home Owners

2010-06-07T15:37:00.006+10:00

Working out what you can afford to spend on a mortgage when you're looking at buying your first home is extremely important, more important than working out what the banks will lend you.

The following 2-minute video discusses why this is the case and the easiest way to work out how much you can afford to spend on a mortgage.

Interest Rates Hold Steady

2010-06-01T15:47:00.002+10:00

Interest rate update - RBA has left interest rates on hold for another month. The Australian stock market has been turbulent not to mention the world markets. The property market is also still solid with auction clearance rates slightly lower and still solid over the past few week.

No doubt, the stability in interest rates will be very much welcomed.

Avoiding the Money Obsession & Enjoying Life

2010-05-03T17:19:00.004+10:00

Money. It's an obsession in today's society, for most people. And the amount of income you have doesn't change the depth of the obsession, it's all down to your mindset. I'm passionate about having money work for myself, my family and those I deal with without having to focus on it 24x7.

It all comes down to working out what you want (critical step), determining how much money you need to do those things, setting a plan and working the plan.

I think about finance and property for other people 8 hours a day, 5 days a week, so I want to think about other things when I'm at home! So, for me, the plan needs to be as simple as possible and once in place, should require minimal ongoing input.

Personally, I like investment properties. I can set them up, put a good agent in place and forget about them. A small initial time investment and then I can sit back. Too easy.

What investment vehicle are you interested in or do you prefer? Work out what it is, make a plan, set it in motion and then focus on enjoying life!

How "Knowing Yourself" Leads to REAL WEALTH

2009-11-09T15:39:00.009+11:00

Now, it's OK to have expensive hobbies, it's also OK to be only mildly interested in investing for your future. The key is to know this about yourself so that you can USE THIS TO YOUR ADVANTAGE!

In fact, I believe it's perhaps easier to make a millionaire out of someone with "some interest" in all things financial than it is to turn someone who is passionate about property, shares or business into a millionaire.... a big statement, I know, but in my experience is it's often true!!

The primary reason for this is that becoming wealthy is boringly simple!

This is not to say that if someone has a passion in an area they can't get wealthy but consider the following:

A person who has a passion for shares won't be content to buy and hold the top 15 blue chip stocks. Ohhh no, they'll need to find the "up and coming" companies - the ones that will make them serious money and they'll need to tweak the portfolio - so they can our perform the market. They'll thrive on riding the highs and sweating the lows...

The same goes for property enthusiasts.

Owning an investment property is about as interesting as watching grass grow... but buying and selling property creates a really, addictive rush.... it's so much fun when you make money, and a real downer when the market goes the wrong way or the renovation costs blow out ....

And what about business? You guessed it, exactly the same...

Entrepreneurial types love to create things, to come up with an idea, workshop it and put it out to the market where your clients will love it, or hate it... they often love the thrill of a new business venture which is much more exciting than keeping an existing business going well...

As a novice you buy the known performers and sit on them. As an enthusiast you are more likely to try trading and renovating and other more interesting and challenging markets. And for many people, stepping up a level in complexity sees them out of their depth knowledge wise which means they actually end up making less money than if they had just kept it simple.

In a nutshell: A serious passion in investing or business can come at a price.

(Note: If you're an enthusiast don't loose heart! Keep learning and growing and you could become seriously wealthy, but as well as going to the next level, also be sure to take action on the basics as well - the fool proof steps of buying and holding good assets that will give consistently good returns over time).

Ok, so that may make sense, but how about turning the person with "some interest" in investing into a millionaire?

Well, for those with just a bit of time to invest it's simply a matter of getting you focused and excited enough to take action. Then, once you've taken action you will likely loose interest. Which is PERFECT.

An investment property doesn't need you to look at it every day to make it go up in value. It doesn't need to be sold and upgraded either. If you buy it and give it to a property manager and TOTALLY forget about it, it wouldn't be ideal but it would still double in value over a 10-15 year period. A share portfolio of blue chip stocks would be exactly the same.

Becoming a millionaire is astoundingly simple. It's as simple as buying a good assets and holding them. And when they appreciate use the equity you've made to buy some more.

It can be made more complex but it needn't be.

Now the next step is to work out what action to take....

The second step is all about PASSION

2009-10-18T11:17:00.019+11:00

Ok, it's been a while coming (there's a lot of activity in the market which means less time for writing blogs!) but now we're up to Step 2...

Once you know how you manage your current money AND you've worked out how to live on less than 90% of your income (For a reminder of Step 1 click here) it's time to pat yourself on the back and then take the next step forward.

The next step is to determine where investing for your future fits on your "Financial Passion Scale".

There's no use going into a lot of detail about what you might want and how you might get it unless you know your level of passion :

Passionate: You love the idea of learning how to trade shares yourself or you'd love to be a full time property investor, renovator or developer. You want to know everything you can in the relevant area and LOVE talking to like minded people and switched on professionals.

Vague Interest: You love your job and know you should invest for your future. You're happy to learn enough to invest in the right things to ensure a comfortable retirement but you certainly don't want to be thinking about it daily!

Totally Disinterested: You really dislike the idea of anything to do with money and you would love your nest egg to magically appear. You want someone else to take responsibility for making it all happen.

Where do you sit? The answer to this question is very important. It determines how you are likely to ACT when it comes to investing in your future. And if you know that then you can plan accordingly.

Let's put it into a diagram so it makes more sense. The diagram below allows you to see a visual representation of areas of your life in terms of:

Your Level of Passion vs. The Long Term Financial Benefit.

Take just a few moments to work out what fits into each quadrant for you own life.... and then place a few key financial items as well.

For example, where on the passion scale would you place the following consistently profitable items?
(These should be at the top of the "Financial Benefit" scale - they are generally profitable over the long term)

Buying & Holding Property

Buying & Holding Shares

How about the following potentially profitable activities.
(They should be lower on the scale "Financial Benefit" scale as they are not always profitable over the long term)

Running A Business

Buying, Renovating & Selling Property

Share Trading

And how about these very unprofitable activities.

An expensive hobby - travelling, water skiing etc.

Expensive additions - smoking, recreational drugs

It could look something like this:

It's critical that you honestly place each item because it determines exactly what action you need to be taking to secure your financial future... and that it was I will cover in the next blog....

STOP PRESS: To fix or not to fix??

2009-09-03T17:54:00.011+10:00

The fixed rates are rising at a rapid rate. Variable rates are still very low being under 5.5% but the 3 and 5 year fixed rates are up around the 7-7.5% mark (and rising) with many of the well known lenders. That's a big difference!

So should you fix or should you stay on a variable rate?

Well, I'm not a financial planner and I'm not an economist so in no way can I give you the right answer for your specific situation, nor can I tell you what's going to happen to variable rates in the future... I can however give you some pertinent points to help you decide what's right for yourself.

The theory goes that if you stayed on a variable rate (a basic rate or something similar under a professional pack) through the highs and the lows of rate changes, then over a period of 20 years or so you would be better off than if you had a 3 year fixed rate that rolled onto the next 3 year fixed rate at the end of every period.

So POINT 1 would be - over the long term it is likely that you would be financially better off by staying on a varable rate.

Hindsight shows us however that over a 1-5 year period there are many occassions when locking in a fixed rate would have saved you money.... The catch is, it's very difficult to predict when a fixed rate is going to pay dividends. If we had a crystal ball it would be too easy, but since we don't it really is a case of taking the information at the time of making the decision (media reports, economic updates and your own gut feel) and making the best decision you can - my estimate is that you'll likely save money a little less than 50% of the time.

Therefore POINT 2 is - when fixing a rate, sometimes you'll pay more, sometimes you'll save. Without a crystal ball it's a case of making the best decision you can based on the information available at the time of fixing.

So if you're not necessarily going to save, why would you fix? My thoughts are that there's no use being financially better off on the variable rate if during a period of high variable rates you can't actually afford to make the repayments! Nor would you be better off if you managed to make the repayments but ended up having a nervous breakdown due to the lack of sleep that was brought on by worrying about how high rates were going to go and how you are going to find the money to make the repayments if you're variable rate kept going up.

Which brings me to POINT 3 (which is a very important point) - fixing your interest rate should not be about beating the bank! (see Point 1 & Point 2). Fix for security, stability and if you want a "set-and-forget" solution to your lending needs.

Getting the best of both worlds...

If you like to hedge your bets and want to savour the benefits of the low variable rate while still protecting yourself against the challenges of much higher rates then you may like the idea of a "Clayton's Fixed Rate Loan". This is not an official term but it sets the scene for the option of the DIY style of fixed rate ...

Basically you determine what your repayments would be based on today's fixed rate (or call the VISIONTeam and we can calculate that for you) and then you change the repayments that you're making on your variable rate loan to the higher repayments.

Essentially you are still getting the cost savings of the low variable rate but you are making repayments as if the rate had risen and was fixed. The benefit is that if the rates rise more slowly than expected you just continue to make exactly the same repayments and over a period of time you will save lots on your interest. If the variable rate ends up rising higher than the "Claytons Fixed Rate" that you have set as your bench mark then you will have built up a buffer of extra funds that you can then draw on to reduce the impact of the now higher variable repayments that will be due.

The first step to wealth is offensively simple!

2009-08-10T22:31:00.006+10:00

The first and most important step is to understand & take ownership for how you currently manage your money. Have you done the 2 minute exercise in the last blog? If not take 120 seconds to do it now.

So, are you moving forward on your income or are you going backwards?

Are you spending less than you earn or are you spending more?

If you're moving forward that's great! Are you spending 10% less than you earn? If so skip this blog and move on with something else for today... I look forward to talking to you about Step 2.

If you're not going forward as quickly as you would like or if you're going backwards - congratulations - why? Because you know where you're heading! It's so important!

Now, have you taken ownership? Or do you have excuses as to why last year was a special year where it wasn't your fault that you spent more than you earned... don't take this the wrong way, I know sometimes things go wrong and it's not necessarily your fault but over the period of a year you have the chance to compensate for life's unexpected hiccups! If you were robbed and you had to pay an excess of $1,000 that's a big cost and would likely break the budget for that month... but only you can choose to take ownership for that unexpected expense and only you can choose to spend less elsewhere to make sure you stay on track for the coming months.

Don't rely on a future pay rise to get you back on track. It doesn't work that way. You need to take ownership of how you spend your money now.

As soon as you take ownerhsip you'll find that spending less than you earn becomes much easier. When you drop all excuses it's as simple as knowing where you're up to and making the small decisions each day to stay on track.

Boringly simple? You bet.
And that's why I believe many intelligent people find it hard to get wealthy.
It's so easy they miss the first step.

Once you've got this one under control it's time for Step 2...

Is your intelligence making you poor?

2009-08-10T21:02:00.009+10:00

Ok, so I've stated that Intelligence is Expensive but how do you know if you're intelligence is actually making you poor?

It's very, very simple.

Look at your bank statements from one year ago and add together all of the cash in your savings accounts. Then, take from that figure the total of all your debt on your credit cards, personal loans and home loans. This is your starting point. (If you have a home loan it is likely that you will be starting with a negative figure)

Now do the same for today.

Is today's figure more positive than last year's figure?

Notice that the above equation has nothing to do with the size of your income? If you earned $50,000 and went forward you're a better driver than someone that has earned $300,000 and going backwards (granted they might be in a nicer car but you are the better driver!!)

Ideally you'll have saved at least 10% of your income so if you earn $150,000 you'll have saved $15,000. (If you've achieved this, that's great!! Be sure to stay tuned to future blogs to check how well you're doing at making your money work for you).

Now if you own property the values may have gone up and that's great. But in this exercise, unless you have bought a new property, and used your 10% savings for that, it's irrelevent to the equation.

If you didn't move forward, did you stay in the same position or did you go backwards slightly (or even a lot)? Why? Be careful how you answer this. Every year there will be unexpected expenses (it's the same when you drive a car - the car in front stops suddenly, children chase balls onto the road...things happen). The key is to drive safely and plan for the unexpected.

Now if you're not quite on track, it's not all doom and gloom... tune in next week for what I believe is the most important step in wealth creation...

Intelligence is Expensive

2009-08-05T07:02:00.010+10:00

During my time in finance one point has become abundantly clear - the key to wealth creation has very little to do with the size of your pay packet. In fact, I would go so far as to suggest that a higher income can sometimes make it more difficult to become wealthy!

There are a few reasons for this but the first one is:

The more intelligent you are, the more you're likely you are to earn a good income from Day 1 in the workforce and the more likely you are to get trapped into the rich lifestyle cycle.

The reason for this is that having high earning capacity is a bit like owning a fast car. If you know how to drive it and watch your speed it's all good. But if you don't drive that well, or if you forget to watch the odometer you can end up crashing & burning or, at the very least, you can end up with lots of speeding tickets.

A good income from an early age often leads to the creation of a lifestyle that makes you feel rich - a life with the latest gadgets, cars and a steady diet of good food and fines wines - but the rich lifestyle is the very thing that keeps you poor. In essence, you earn a great income but most of it's already spent before it hits your bank account.

4 Keys to Loan Structure: Part 4

2009-07-30T20:43:00.007+10:00

4) Minimising bank fees

Extra bank fees can include $200 for the valuation of each extra property, higher mortgage insurance premiums if applicable, extra settlement fees.

The extra costs for a simple top-up can range from $200 but can be well above this if you have a few properties. And, there’s more…

Yes, the list goes on, other negatives of cross securitization include:

The lack of flexibility with regards to accessing extra funds,

Loss of control of funds when selling a property cross-secured with another property that has dropped in value,

Being tied to one lender if one or more properties have dropped in value,

Reduction in negotiating power when a lender has control over multiple properties

Are there any positives? While the positives are generally in the favour of the bank, three reasons why cross securitization may be considered are:

To reduce fees if a property is only to be held for a short time

To obtain a higher discount by having larger loans

To make a deal possible when an unusual property is being purchased

In these cases it is important to carefully way the positives and the negatives to ensure an informed decision is made.

4 Keys to Loan Structure: Part 3

2009-07-15T16:15:00.015+10:00

3) Ensuring maximum tax effectiveness of your loans

When it comes to tax time having your loans correctly structured saves time, money and stress. If loans have not been correctly structured, calculating the deductible interest can be a nightmare.

Also, you may find out that you are paying down investment debt when you have no desire to do so!

Getting it right is critical, and making sure it’s right at the start is ideal.

4 Keys to Loan Structure: Part 2

2009-07-15T16:11:00.008+10:00

2) Maximising your borrowing potential for future investment

Each lender has it’s own method of calculating the maximum loan they feel you can afford. Some of the areas where they vary include:

The benchmark interest rate used - a higher rate ensures a bigger buffer but lowers the maximum borrowing limit
The living allowance estimate
Whether or not tax deductions received on investment loans are considered, and
The rate used to calculate the repayments on debts with other lenders

The differences mean that a couple with two $50,000 incomes who wish to borrow for investment purposes could borrow $300,000 more with one lender than they could with another and there are a whole host of options in between.

This is a massive difference and can have a huge affect on investment potential. By selecting lenders carefully, splitting loans between lenders and using the lenders in a particular order your borrowing capacity can be maximized, which in turn will allow you to maximise investment opportunities.

4 Keys to Loan Structure: Part 1

2009-06-16T16:30:00.010+10:00

Getting the structure of lending correct is critical for 4 very important reasons... today we look at PART 1

1) Making sure your interests are protected (instead of the banks!)

When you have more than one property the structuring of your loans becomes critical.
If you have been dealing with a lender directly then it is very likely that you will have the following situation:

The 1st loan you set up (to buy Property 1) will be secured by just that property
The 2nd loan you set up (to buy the Property 2) will be secured Property 1 AND Property 2
The 3rd loan you set up (to buy the Property 3) will be secured Property 1, Property 2 AND Property 3.,. and so on.

This is great for the bank - if something happens and you can not pay the second loan then they can sell Property 1 AND Property 2 without your consent!

To protect your interests and give you as much control as possible the loan structure should ensure that each loan is secured by just one property. With this being the case, the bank will only have easy access to the property securing the loan that is in default. They will need to take legal action to access any further assets giving you valuable time to get up to date on loan repayments.

Getting Started....

2009-06-16T14:05:00.001+10:00

Post number one, short & sweet! Just getting the hang of things :-)