Refinancing
The problems with refinancing:
Refinancing is a popular option when it comes to trying to save money on your mortgage. However, this is not a one size fits all approach. Finance and home loans are situational, meaning refinancing could be the best option for one situation, but not for another.
What is refinancing:
Refinancing refers to taking out a new loan to pay out your current home loan. When refinancing, you replace your current mortgage with a new loan, adopting different terms and conditions that can have varying impacts on the length of your loan, your mortgage repayments and how much interest you pay. You may move from a 30 year to a 15 year term or switch from an adjustable to a fixed rate, however the most common change is a lower interest rate.
How does refinancing mortgage work?
Refinancing works in different ways. In some cases, refinancing means resetting the loan to find a better interest rate. If you refinance to a new 30 year loan five years into your current 30 year loan, you’ll start over and have 30 years to repay again. It is important to take this into consideration when refinancing as you can often wind up paying more over time because of fees, closing costs and a longer loan term.
Reasons to refinance
Lower interest rate and payment
Change rate type
Cash out
Change loan term
Reasons not to refinance
Different types of refinancing
Rate-and-term
Cash-out
Cash-in
No closing cost
Streamline
Criteria for refinancing
Lenders will take into account several factors when deciding whether or not you qualify for refinancing. These are similar to a home loan and include:
How to use tax to build wealth
Tax minimisation is crucial to any good finance strategy, especially when investing. Some of these strategies involve, negative gearing investment properties, making superannuation salary sacrifice contributions and claiming deductions relating directly to investment income.
Superannuation
Refinancing works in different ways. In some cases, refinancing means resetting the loan to find a better interest rate. If you refinance to a new 30 year loan five years into your current 30 year loan, you’ll start over and have 30 years to repay again. It is important to take this into consideration when refinancing as you can often wind up paying more over time because of fees, closing costs and a longer loan term.
After-tax contribution to your superannuation
In the past, this strategy was only available to the self-employed and those earning less than 10% of their income as an employee. But since 2017, this strategy has been available to all employees
If you make super contributions from your after-tax income or savings, you may be able to claim them as a tax deduction and reduce your taxable income, while boosting your super.
The contribution will then be taxed in your super fund, generally at the concessional rate of up to 15%. This is instead of paying tax at your marginal tax rate, which could be up to 47% (including Medicare levy). This could help you save up to 32% and help you retire with more.
Salary sacrifice
Sacrificing a portion of your pre-tax wage reduces your gross income and your tax liability.
Investment bonds
Investment or insurance bonds are taxed at the company rate, which can often be lower than marginal rates. They also become tax free after 10 years (as long as there are no withdrawals in that time).
These bonds are offered by insurance companies and all earnings are taxed at the corporate tax rate of 30%. If you have a marginal tax rate higher than 30% and aren’t looking to making any withdrawals, insurance bonds are a really good way to minimise tax.
Also, you are taxed internally which means you don’t need to include the earnings on your tax return.
Family trust/asset splitting
A family trust allows you to share income, and the tax that comes with it, around family members. This is especially useful for high income earners to avoid high tax brackets.
Negative gearing
Negative gearing is where the investment income is less than the cost of the investment.
Negative gearing is relevant for those involved in investment properties that will achieve capital growth in the future. Investors utilising negatively gearing can claim a tax deduction for the investment lost, saving money on tax and making up the loss with future capital gains.
How to use tax to build wealth
Finding the best tax minimisation strategy for you is all about understanding your situation, and the options ahead of you. Different tax brackets and investment and retirement options means everyone will need a different approach and it can be difficult to find that approach on your own.
Contact us now to get the ball rolling and see which approach is best for you.
