Archives for November 2016
A couple of years ago, I started questioning what I was saving my money for, I am not a frivolous spender nor a reckless gambler when it comes to finances but I decided to look into ways in which I could use my savings to grow my wealth. I’ve since used the money that I have saved, or at least some of it, to take advantage of various financial opportunities that I wanted to share, so if you have saved up some money through the years then here are some tips on how to put it to work.
Stocks and Shares
A slightly different way to invest your cash when it comes to the stock market is to trade the stocks themselves as opposed to betting on their rise or fall. Naturally when it comes to owning stocks, you will only want the price to grow and the real trick is knowing when to sell them. Stocks are a slightly more secure way of investing your cash than spread betting as should the price go down, you can simply keep hold of your shares in the hope that they will once again rise. Many stocks offer dividends which can give you a small payout each year and act as something of a loss insulator should prices drop. From a tax point of view, you will pay capital gains of between 25-39% on any stocks sold in their first year and around 15% after the year is out. Like spread betting, you can start trading with as little as $100.
Spread betting, in a nutshell, is about gambling on the future price of various markets such as currency, oil, commodities and stocks and shares. One of the biggest bonuses of this type of investment is that spread betting is considered by the government as a form of gambling and as such you will not pay taxes on your profits, an appealing option and one that can prove to be very fruitful. You will naturally need to have a firm grasp of the markets to which you will be betting on and be able have good analytical skills in order to see which way the market is heading. You can start out with companies such as ETX Capital with just a few hundred dollars and you can bet on prices for the day or even a longer period of time. Spread betting is exciting and can be a great way to grow your wealth.
There are more businesses being created than ever before and if you have an eye for what will become successful then you could stand to make a healthy profit by investing in these businesses during their early years. Start-ups rely heavily on private investment and if there is a new business entering into an industry that you are already familiar with then you could be best placed to invest your money in their new idea. Ensure that you negotiate a good contract for your investment as there are a lot of risks with new businesses, 54% fail within their first 3 years and the last thing you want is for your investment to turn sour.
Most homeowners choose the standard 30-year fixed-rate mortgage when buying a home. While a 30-year mortgage offers lower mortgage payments, it also means paying tens of thousands more in interest. Many people buying a home automatically shy away from a 15-year mortgage due to higher payments, but the potential savings may be so high that it’s worth reducing your expenses or buying a smaller house to make it happen.
Here are the most important benefits of a 15-year home loan that you should consider before buying.
Reduced interest charges
Let’s assume you buy a home for $260,000 with $52,000 down for a total mortgage of $208,000. While the rate for a 30-year mortgage may be around 3.65%, the interest rate for a 15-year mortgage may be just 2.70%. This gives you a monthly payment of $957 for a 30-year loan and $1,407 with a 15-year mortgage.
While this big difference in monthly payments turns away many buyers, it’s important to focus on the cost of your mortgage over the life of the loan rather than focusing solely on the monthly payments.
Over the life of this 30-year mortgage, you will pay a total of $136,700 in interest. Compare tat to just $45,100 with a 15-year loan — a savings of more than $91,000! You can find out just how much you could save in interest with a 15-year mortgage by using a mortgage interest calculator.
Build equity faster
One of the most overlooked benefits of a 15-year loan is the ability to build equity in your home faster than with a 30-year loan. This is because fixed-rate loans have amortizing payments with the payment applied to interest and principal every month. A 15-year loan needs to be paid off faster, so more of your monthly payments will go toward the principal balance rather than interest.
In the above example, the first monthly payment of $957 for a 30-year loan will break down to $316 toward principal and $641 in interest. After five years, $379 of every payment goes to principal and $578 goes toward interest which means you will still be building equity very slowly. After five years of monthly payments, you will have built up just $20,800 in equity.
15-year mortgages work more in your favor. Your first payment of $1,407 breaks down to $939 in principal and $468 in interest. After five years, you will be paying $1,072 a month toward principal and just $335 in interest with total equity of $60,200.
Because you will build equity faster, you will have a buffer against changes in real estate prices and you’ll have equity you can tap with a home equity loan or HELOC if you need to. This can also potentially make refinancing your loan easier down the road because you will have a lower loan-to-value ratio with less risk for the lender.
Pay off your mortgage faster
Finally, a 15-year mortgage can help with paying off your mortgage early — a dream for many homeowners. Not only can you avoid having a mortgage hanging over your head for 30 years, you still have the option of making additional payments to principal over the course of the loan, whether you add a bit to your monthly payment or make lump-sum payments with your tax refund. A shorter loan term can help you live mortgage-free earlier in life so you can focus on savings or retirement.
About 85% of new mortgages today have a 30-year term, but it’s important to explore all of your options. A 15-year mortgage means making half as many mortgage payments and saving thousands in interest over the life of your loan while paying a lower interest rate. If you can afford the higher monthly payments of a 15-year home loan, there is almost no reason not to do it.
The property market is still in a gingerly stage; mortgage rates are at a low, and people may be tempted to change their mortgages and lock in on a fixed rate.
But is it always a good idea to do so?
Sure, locking into a fixed mortgage or investment loan gives you the advantage of knowing what your financial obligations will be for a pre-determined period and plan accordingly. This is a good strategy if you want certainty for your cash flow commitments- especially if you are sure interest rates will likely rise significantly.
However, fixing your interest rate is not always the right decision. Here are instances to consider first:
- Are you going to need the equity on your property for another investment during the period?
During the period of your fixed mortgage, you may need to access the equity to invest in a different financial obligation. The price won’t come cheap as your mortgage lender will charge you for breaking commitment. Unless you are sure the revenue from the new investment will offset the costs, accessing equity is a bad idea.
- Are you going to sell your property during the fixed loan period?
You never know the future, there might be an attractive opportunity available or a relocation plan, and selling your home is the next step. Unfortunately, mortgage lenders have penalties for breaking loan commitments, and it might cost you a lot. Before you rush to fix your interest rate, be sure of your relocation plans for the period.
- Will you need an offset account?
This is a transaction account linked to your loan. With an offset account, you can credit your loan occasionally to balance it and reduce interest payable on the loan. However, most fixed rates loans don’t permit an offset account. If you need one, don’t fix your interest rates.
- Opportunity for extra loan repayments
Some people are comfortable paying off their fixed interest rates as stipulated, but there are times when you’ll may want to pay more than your regular rate for the term. However, many lenders have limits to the extra amount you can pay. Having strict limits on your loan can be a bad idea at times like this. In order to avoid being stuck, consider making a part of your mortgage variable and benefiting from an offset account.
- When you can benefit from variable and fixed rates
If you are expecting a tidy sum that could be used to offset a bulk of your rates in the near future, consider getting a balanced fixed and variable loan. If you have one loan, you could split it into fixed and variable parts for that much-needed flexibility. While you offset on end, you maintain fixed payments at the other.
- When loans drop further
You don’t want to be that person who locks into a fixed rate mortgage only to find out the rates have dropped lower again. Before you rush into a commitment, study the market and be sure of the projections. Many people have been left disheartened because rates turned against them.