Every loan has a declared rate of interest. The interest could be a fixed rate or floating. It could be a combination as well, fixed for a few years and then adjustable as per the prevailing lending rates in the market. All standard loans are re-paid over a period and every instalment has a bit of the principal which is the loan amount and a bit of interest. Most loans are designed in a way wherein more interest is paid in the first few months or years and towards the latter half of the term it is more of the principal amount being re-paid and less of interest.

An interest only loan is an unconventional option in which you don’t repay any amount of the principal loan. You only repay the interest. Only when your interest is re-paid do you start repaying the principal loan amount. This is mostly applicable in cases of properties. Interest only loans are not readily available for all kinds of purchases or spending purposes.

Pros and Cons of Interest Only Loan

The Pros

• An Interest only loan is beneficial for those who are looking at lower monthly repayments. Since the principal amount is not being considered in the initial instalments, the interest is split evenly into a certain number of months don’t amount to as much as it would had the principal been taken into the calculations.
• Those who want to claim tax deductions may do well with an interest only loan. (Be sure to consult with your accountant on this point). This helps investors as well as business owners. Interest only loans are often opted for by property investors and commercial property owners.
• Interest only loans help property investors who don’t intend to hold onto an investment for too long. They can keep paying lower instalments, flip the property or get a buyer and sell the asset for a nice profit. A standard loan doesn’t appeal much in such cases.

The Cons

• Interest only loans make no sense for homeowners because all one pays is the interest and the entire principal amount is left to be re-paid. There is little room to save if one wants to repay the entire loan before the term ends.
• It also doesn’t make sense to allow the lender to make all the profit and then to keep repaying the principal amount which can go awry if someone loses a job or incurs losses in business.
• Not every lender offers interest only loans so there are fewer options available.

Debt is unavoidable. All of us have debts. For some people, the debts are simple obligations like utility bills. For many, it would be a credit card bill. From mortgage to paying back the student loan, people have myriad types of debts. It is almost impossible to avoid debts. Even the billionaires of the world have humongous business loans to repay. They continue to persist with those debts because they are necessary and they haven’t turned into bad debts.

There is good debt and there is bad debt. You cannot and should not avoid good debt. Let us explore the simple differences between bad debt and good debt.

• A home loan or mortgage is a good debt. You have bought a house or apartment. It is a tangible asset and would offer generous returns in the future. Unless you have purchased a property that no one would buy, you will almost always make money when you choose to sell the house or apartment.
• Bad debt is any loan that is unnecessary, is hitting your finances hard and may be getting unmanageable – those debts which are liabilities rather than assets. Skyrocketing credit card debt is bad because it is not necessarily leading to tangible assets and you would be paying high rates of interest. Personal loans and unsecured loans are also bad debts if you don’t have a very reasonable purpose. Allowing utility bills and other financial obligations to build up would also qualify as bad debts. You would have to pay penalties that are avoidable and your credit history could take a hit.

 

There are grey areas when it comes to good debt and bad debt. A car loan is neither good nor bad. Since cars are depreciating assets, you are better off purchasing one with a down payment or in cash. But if you don’t have enough cash or don’t want to use it up, then you need a loan.

It is not necessary to make debts complicated. Necessary debt with reasonable interests and when it is manageable is good debt. Any debt that is needless, demands high interests and becomes a burden is bad debt.

Buying a home is difficult. Buying a home when someone is very young is all-the-more challenging. Young professionals may be able to pay the instalments of the mortgage but saving enough to make the down payment is an uphill task. When one is in their twenties or even early thirties living in the city or when expenses are reasonably higher due to various experiences that the young usually indulge in, it becomes difficult to set aside the money needed to buy a house.

The down payment is the biggest financial challenge. The second challenge is qualifying for the mortgage. There are many lenders with varying rates, the eligibility criteria would be a hurdle and the homebuyer needs to manage their finances well so they can keep making timely payments without impairing their lifestyle. Your credit history will also play a pivotal role in the mortgage preapproval and approval process.

If you are planning to buy a house, you could get your parents or a family member to make some contribution in myriad ways. You may want them to pay a part of the down payment. You may even get them have a cash gift that takes care of the entire down payment. Parents often use the equity of their large home, a second property or an unused block of land to fund the down payment of their grownup child’s home. Families could contribute whatever amount of money they can afford and whatever would be useful for your mortgage.

Another effective way to help your child is to become the guarantor. It is quite possible that your child would fall short of the credit score requirements by just a score of points or a dozen odd points. He or she may fall short by a hundred points. The income and disposable part of the income, which is considered by the banks or mortgage lenders while processing home loan applications, may not be sufficient. There can be other red flags which would become the reason for rejection. Instead of having your child’s mortgage application turned down or some criterion playing spoilsport, you can chip in as the guarantor.

Parents or family members can become your guarantor as well. Having a guarantor will increase your chances of qualifying for mortgage and almost assure you a fair deal. Shortfall in credit score will not be a deterrent. The lender will not impose high fees or unreasonable rates of interest. You would not only qualify for the mortgage but also get approved sooner and would also get a good deal, including the loan to value ratio and the rate of interest.

Bankruptcy is a legal provision that allows you to declare yourself incapable of repaying debts. You could be truly bankrupt, which literally means that you don’t have a penny in your bank. Realistically, you don’t have enough money to repay the loans or creditors and would want the debts to be waived off.

Bankruptcy can be obtained for due to personal reasons, including strife among spouses. Personal bankruptcy or insolvency can be due to unemployment or if your business has run into unbearable losses. There can be other causes such as failing health or some personal incapacity that prevents you from working and hence repaying your debts.

Bankruptcy is almost always looked at from the perspective of debt and it is a way to get relieved of the obligations to repay. However, what most people don’t realize is that bankruptcy will derail your life the way you know it. Let us factor in these realities to understand bankruptcy.

• When you declare bankruptcy, you are effectively telling the world that you are not credit worthy, that you have no money and that you would not repay your lenders, whom you had pledged to repay. Your assets will be liquidated but they may not yield enough returns to repay all your creditors or lenders. An appointed trustee will try to repay as much as possible to all creditors but they will take a hit. The whole world of lending will come to know that your word is not good enough and you would anyway enter a three-year bankruptcy period and a seven-year black hole with your credit history. No bank or institutionalized lender will lend you any money for almost a decade after you declare bankruptcy. It takes time to rebuild credit after the seven-year abyss.
• Since all your assets will be liquidated in case of personal insolvency, you wouldn’t have much on you. Apart from some items that have sentimental value and those that are very basic, all assets in your household and whatever you own will be used to repay creditors. Your life as you knew it will change and it would take a long time to rebuild that.
• You would also be ineligible for various types of jobs. Business avenues will dry up. You wouldn’t get investors to trust you.

Investing is the quintessential key to financial planning. No financial plan, short term or long term, can be effective unless there is an investment strategy integrated into the approach. When you actually start investing, you would have to endure a learning curve. Knowing a few of the golden rules of investing can help you through the nascent phase and you can hone your skills, acumen and judgment as an investor.

• As an investor, you must always move promptly. You cannot wait too long to decide to invest. You would miss the bus. You cannot wait too long to make an exit. You may incur losses. Entering and exiting a trade at the right time, buying something at the right time or selling an asset at an opportune moment are the bedrocks of investment.
• While you must have time by your side, don’t obsess about timing. Patience does payoff in the end, provided you are watchful and don’t make poor decisions. No one gets rich overnight. Even those who make windfall gains and apparently seem to become rich in short spans of time have had years of practice or learning. It is very difficult to start with a humble sum of money and churn out a million in no time.
• You should never invest all your money in the same stock or fund. It is considered wise to always contemplate multiple funds. You need not be an expert in all those funds. You can invest more in a fund you understand or stocks you like but do diversify your investments. That is the first step to mitigate risks.
• Always know what you want and when you want it. Don’t wait for unprecedented profits. If you have attained your target, quit the trade or exit the investment. Have a deadline in mind. You can exceed the deadline if there is a good enough reason. Else, it is time to shift your focus on other investment opportunities.
• Understand that every financial market undergoes a cycle. There will be appreciation and depreciation, troughs or lulls. Try to ride the cycle or the waves to your benefit. But don’t try to emulate what everyone else is doing without really understanding why. Others may have different goals or agendas.
• Investment is neither about buying and holding nor about buying and selling. You have to combine a bit of both. Buy, sell, hold, wait or just dispose of an asset, depending on the circumstances. Don’t be inflexible with your approach.

 

Be a dedicated investor, check your investments, study and review your strategies.

Home loans or mortgages are designed to help any and every homebuyer, provided they meet specific prerequisites. From credit score to income, the loan to value ratio or the down payment to the type of employment or business one has, everything will be under consideration while determining eligibility. From employed and self-employed professionals, business owners and independent contractors or freelancers. The concept of the home loan doesn’t differentiate on the basis of the type of employment. However, the eligibility factors or the criteria for approval would vary.

There is no alternative to home loan or mortgage if you wish to buy a property, unless it is a commercial property in which case you can use a business or corporate loan. For self-employed professionals, the exact criteria will vary from one bank to another but the eligibility factors will be different from that of employed professionals.

• You would need your tax returns and financial statements. The purpose is to show how much in taxes you have been paying, confirming your income. The financial statements are assessed to deem financial eligibility, whether or not you can afford the instalment or the mortgage. There are various online home loan calculators that you can use to deem eligibility and how much you can comfortably afford towards a mortgage. For self-employed professionals, the approach to calculate dependents and other financial commitments is similar to that of employed people. However, some stringency is expected as self-employed professionals don’t have the financial security of employed professionals. Self-employed professionals may incur losses and may not earn anything in a given month or quarter.
• Self-employed professionals must have been in their present business or profession for at least twelve consecutive months. The longer one has been in the profession, continuously, the better. Depending on the nature of self-employment, there should be GST paid for the same period of time that one has been in the specific line of work. The GST statements would be crucial. Bank account statements would also need to be furnished.
• The income, the GST paid, the taxes paid and filed for, business activity and the amount of money one can comfortably spare will determine the loan amount. Usually, self-employed professionals can borrow up to 80% of the sale price of the home but various factors will influence the final loan to value ratio.

Almost 75% of Aussies aged forty-five and working want to retire in five years. By global standards, Aussies are much more in favour of retiring early, surpassed by only Argentina and France. However, harbouring the desire doesn’t imply most people manage to retire by the time they are fifty. Almost half of all those who want to retire early don’t go through with their plans. Those who are planning now have reportedly stated in many surveys that they don’t see themselves actually retiring although they strongly wish to do so.

The biggest hindrance in retiring early is financial. Most people are not financially equipped to work ten years less and don’t have enough saved up to keep living off their savings for decades. According to many surveys, around 70% of those wishing early retirement don’t have enough savings. Lack of savings is not the only reason though. Having dependents and existing debts are two common reasons why people choose to keep working.

• If you plan to retire early, you likewise plan accordingly and do so as soon as possible. Financial managers these days are suggesting that people plan for retirement the moment they hit thirty. That allows twenty good years and possibly the highest earning years to save enough for retirement. Twenty years would also be good enough to pay all debts, from home loans to car loans, raising kids to acquiring enough assets that will assure a healthy and prosperous retirement.
• You may want freedom, seclusion and may wish to travel. You may wish to pursue something you are passionate about or just want to have more time with your loved ones. There can be many motivations for early retirement. You may also want to start a business. Depending on what you wish to do and how you wish to enjoy your retirement, you must have appropriate goals.
• Saving alone will not help. It is advisable to invest in assets that would appreciate over time. From financial products to real estate, precious metals to any other type of investment that you have a penchant for, let your money double and grow instead of trying to stack up savings which will not grow by itself.

There are various kinds of funds that you can invest in. You could choose to manage your own funds or you may choose to have a fund manager. There are funds managed by banks, financial services companies, independent fund managers and there are special investment schemes designed by various institutions. You may invest in stocks, indices, specific commodities, foreign exchange or you can choose mutual funds and other types of managed or unmanaged funds. Most funds can be classified as active or passive funds. There are similarities between active and passive funds but it is the difference that calls for attention.

Active Funds: Explained!

Imagine a particular amount that you wish to invest in and pick an index of your choice. You could choose any index of any country. You may also choose global indices. If the fund you choose to invest in is managed by an expert and he or she tends to make manoeuvres from time to time, such as buying and selling or even withholding or future trading, to make you more money than you would make normally, then it is classified as an active fund. Active funds are managed to facilitate more profits than what you would make if you didn’t touch the fund and allowed the investments to bear the returns by default. Active funds are designed to predict the markets and respond or proactively take a step to make more money.

While active funds can make you more money, it is not always assured to get you higher returns.

Passive Funds: Explained!

When you choose a fund that doesn’t require a fund manager or even your involvement to proactively buy and sell, withhold or trade in futures, it is a passive fund. The fund remains untouched and appreciate as the index or the specific stock appreciates. If the index or stock depreciates, then the fund will depreciate. With most passive funds, the associated costs are very low and also demand less attention. You can choose passive funds but your investment may not have a staggering chance of earning you a fortune overnight.

 

Making a household budget is quintessential to financial planning. It is rather simple to come up with a budget. You have your income, you can make a list of expenses you cannot avoid and then decide how much you wish to save every month. Accordingly, you need to cut corners somewhere, invest your money or save, try to increase your income and you should always look for smarter ways to save on unavoidable expenses. The real challenge is to adhere to a household budget. Here is how you can approach the whole daunting challenge of financial planning.

• Don’t spend money when you don’t intend to and don’t have to. Impulsive buying is the biggest threat to savings. Adhere to your grocery list, abide by the budget every time you wish to buy something and you would stick to the math.
• Be firm with your goal to save. This goal may be yearly, quarterly or monthly. But you must break it down to the least possible denominator. Put aside some money every week and that must be untouched savings.
• Limit your use of plastic money, especially credit cards. Use cash and you would naturally run out of it once you have exhausted your budget. To facilitate this, transfer the amount you wish to save from one account to another right after your pay cheque gets credited.
• Savings is a never ending exercise. You may not notice this but the little amounts you spend regularly on the mundane routinely coffee, lunch and snack outside actually end up costing you more than a thousand bucks. If you are living in a major city, then this cost would be up to two thousand and possibly more. Cut down on this expense and you could have handsome savings. Take a homemade lunch to work, avoid one cup of coffee every day or skip a few snacks or meals at fancy restaurants or expensive eateries when you can do without them.
• Avoid debts. From personal loans to credit card debt, all these commitments will cost you dearly. Do some math and check out how much you have paid extra in the last year or years as interest. This entire amount could have been your savings.
• Don’t shop on weekends. It may seem to be a daunting challenge to shop on a weekday or at a particular time on a certain day of the week but that is how you would get some amazing deals. Always try to buy in bulk. Today, most homes have large refrigerators. You may not have larger than life freezers but you can stock up at least a fortnight’s worth of food. When you buy in such bulk, you are bound to save anywhere from 10% to 30% off normal prices.

Every working adult should know the financial basics. Very few people are proactively conscious of their financial wellbeing. Financial health is not just about your present income, your monthly expense and if you are living from one pay cheque to another or if you are managing to put aside a few bucks. You need to have a plan to have your financial affairs in order and in control for a predictably prosperous future. While it is difficult to perfect financial planning overnight, you have to get started somewhere. Get started with the financial basics.

• Always have your accounts organized. We aren’t talking about the bank accounts you have but a professional account of all your incomes, expenses, savings and investments. From your financial liabilities to your assets, everything should be well documented. You may consider a certain expense to be too tiny to find a mention in your account and some incomes may be deemed a surplus. Ideally, you should account for everything.
• Always keep an eye on the official cash rate. It is the standard set by the Reserve Bank determining the cost of borrowing money. In other words, this is the rate at which the central bank lends to other banks. The official cash rate is reviewed from time to time. It goes up and down and remains constant. The focus is to keep a check on inflation but the rate affects all financial products, at least within the regulated banking and finance industry.
• Your mortgage and all other secured or unsecured but conventional loans will be influenced by the official cash rate. A mortgage is an asset in the making because the money you spend, even as interest, is actually getting you a property. Credit card interests and all other secured or unsecured loans excluding business loans would also qualify as debts with no major returns. These would have an adverse impact on your financial health.
• In addition to saving money, you must consider investing your savings. Having savings parked somewhere will not multiply your money and hence you wouldn’t amass wealth. You need to invest in various types of funds or assets that will generate handsome returns. But make investment choices wisely as those too can wipe off your savings.

As always, we recommend speaking to your YFG specialist for expert guidance and assistance.