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Are you struggling to beat high interest rates?
If you are facing difficulty with repaying your loans with high interest rates, here are the three best strategy to follow.
1) Unlock Equity
The price growth of the past few years means that many home owners and investors and sitting on large amounts equity. Why not ease the rates burden by turning that equity into cash and use it to make your interest repayments. In other words, use debt to repay debt. It’s a legitimate strategy for investors who are looking for a short term buffer to help ride out the rough weather. They understand that property prices and interest rates move in cycles and things will get better. There may be tax benefits for some. Talk to your accountant.
Here’s a simple example: Investor Karen has a principal place of residence worth $500,000. She owes $100,000 on the house and has a line of credit of $100,000 which she used to purchase two more properties. But she is struggling to meet the repayments on the investments and knows that if interest rates go up again, or a tenant leaves, she will face a shortfall. She is considering selling one of the properties.
Karen applies to extend the line of credit on her home by another $100,000 which she will use to meet any shortfall. She now has a buffer that will last her for some years before it is fully drawn allowing her to wait for rates to go down again. She also estimates the growth of her investment properties will far exceed the cost of using her equity to hold on to them.
2) Restructure and Consolidate
For small business owners the interest rate hit can be twofold. Increased home loan rates coupled with high rates on business loans really puts a strain on cash flow. One way to overcome this is to find a lender who will allow you to consolidate some or all of the business debt to a home loan in a structure which enables you to track and repay the business debt over a shorter term.
Here’s an example: Allan and Brenda operate a small printing business. They have a home loan and a number of expensive chattel mortgages secured by business equipment. The chattel mortgages are killing them. One has a payout figure of just $13,000, but the repayments are $760 a month. By selecting a lender with a product specifically designed for this scenario, they pay out the chattel mortgage from the equity in their home reducing the minimum monthly repayments to around $90. However, their intention is to pay down the chattel mortgage as quickly as possible so they will make extra repayments of $300 a month which still frees up $460 in cash. They can repeat this with as many of their chattel mortgages as they consider necessary until they wrest back control of their finances.
If cash flow is tight, hunt for a better loan. But don’t do all the work yourself. Ask your Finding Finance broker to help.
Always weigh the costs of leaving your current lender and setting up with another. Your broker should be able to provide you with a full outline of what it will cost with a 3 – 5 year comparison of the two loans.