The Covid-19 pandemic has seen widespread change to our economy and how businesses are able to operate. With restrictions put in place for dental and other allied health practices, many have opted to temporarily close their doors as a precautionary measure.
Taking these events into account has seen lenders review how they assess finance applications. Rather than purely looking at historical data to assess an application, lenders are now seeking a deeper understanding of how a practice has been or could be affected by Covid-19. Applications now require additional information around the changes Covid-19 is having or could have on a medical practice over the in the next 12 months and what strategies are in place to deal with any adverse changes that may occur.
Certain lenders have withdrawn from the medico lending space by no longer offering lenders mortgage insurance waivers and applying their standard assessment metrics where they previously offered more flexible assessments and rate reductions based on the characteristics of a medical professionals application.
It its likely these changes will remain in place for the foreseeable future as the longer term impact of Covid-19 on business in the medical and non-medical space is still unknown.
Medico Finance Australia continues to work through these changes by liaising with practice owners, accountants, business advisers as well as negotiate with lenders to ensure that any personal or business finance applications are prepared with the necessary mitigants in place to have the highest chance of success.
An Offset
account works just like any other transaction account, except for one
fundamental difference. The balance of the offset account is reducing the total
amount of interest on your mortgage thus reducing the life of your loan. The
interest on your loan is calculated on the loan balance minus the balance of
the offset account.
For
example, if you have a mortgage of $650,000 and you were holding $150,000 in
your offset account you would only be paying interest on $500,000. If this was
a 30-year loan term and your interest rate was 5% you would reduce your loan
term by over 8 years and save $343,376
A common
method of maximising the benefit of your offset account is called a “credit
sweep”. It’s relatively simple to set up and could save you tens of thousands
of dollars over the life of your loan.
Here’s what
you need to get started;
A mortgage with a 100% offset facility.
Arrange to have your salary paid
into this account.
A credit card with an interest free
period longer than your income frequency.
The next
step is to use your credit card’s interest free period to pay for all of your
living expenses. This keeps the balance of your offset account as high as
possible.
Clear the
credit card from the offset account each month. An ideal way of making sure
this isn’t missed is to set up a direct debit from the offset account to the
credit card.
By holding your
income in the offset account for as long as possible, you will have reduced the
amount of interest you’ll be charged on your home loan, and by clearing the
credit card before the interest period starts, you won’t have paid any interest
on the card.
It’s having
your cake and eating it to.
Tip; Have the limit of your credit equal to, or less than your monthly income minus your mortgage repayment. This will help to ensure you don’t spend more on the credit card than you can repay at the end of month which will help you to avoid incurring any interest on the credit card.
Disclaimer: This is general information and should not be taken as personal advice. Please contact your Medico Finance Australia finance specialist on 1300 115 740 or info@medicofa.com.au if you would like to discuss your specific situation.
One of the most common questions our clients ask is “What’s better, fixed or variable?”
While there isn’t a one size fits all answer to this question, it’s important to understand the difference between the two and make an educated decision based on your future plans.
The short version is; fixed rates give you certainty while variable rates give you flexibility.
Certainty from fixed rates comes from your rate being locked in at a certain percent for a pre-determined period of time, for example you may choose to have a $500,000 mortgage fixed at the rate of 4.5% for a three year period, this would mean your monthly repayments would be $2,534 for three years.
If rates were to go up during that period you wouldn’t be affected but in turn, if rates were to go down you wouldn’t receive that benefit either. There may also be restrictions on any additional repayments you may wish to make, which is another point to consider.
What you have is the certainty of knowing what your repayments will be.
Fixed Pro.
Repayments remain unchanged if there is a rate rise during the fixed period.
Budgeting and planning may be easier as you know what your loan repayments will be for the fixed term.
Fixed Con.
If interest rates are reduced during your fixed term you won’t receive any benefits.
Extra repayments may be limited and there could be substantial break costs if you decide to pay the loan off during the fixed term.
Variable loan rates fluctuate meaning the rate you pay can increase and decrease. As a guide banks follow the Reserve Bank of Australia’s Cash Rate, but they are free to move rates up and down at their discretion.
The flexibility of a variable loan product comes from the control you have as a borrower. Variable rate professional packages often allow you to make unlimited extra repayments without penalties and have additional loan features such as offset accounts and redraw facilities which can assist you in paying your mortgage off in a shorter period of time.
Continuing from the above example, if you have a $500,000 loan on a variable rate product at 4.5% and the lender increases the rate to 5% your monthly repayments will increase from $2,534 to $2,684. However, if the lender reduced the interest rates from 4.5% to 4% your monthly repayments would decrease from $2,534 to $2,387.
Variable Pro.
Repayments decrease if the lender lowers their rates.
Unlimited extra repayments and additional loan features such as offset accounts and redraw facilities.
Variable Con.
Repayments increase if the lender raises their rates.
Less certainty regarding repayments when making long term financial plans.
Still can’t decide? There is also an option that allows you to hedge your bets and have a combination of the two. This is called a split loan. You may choose to have combination that is 50% fixed and 50% variable or a 20/80 split or 30/70 split.
Ultimately the choice is yours and the “better” option is the one that is the most appropriate for you and your situation.
Disclaimer: This is general information and should not be taken as personal advice. Please contact your Medico Finance Australia finance specialist on 1300 115 740 or info@medicofa.com.au if you would like to discuss your specific situation. The above example is based on a 30-year loan term and does not take any additional fees and charges that may be payable into account.
