Some people think finance is just an interest rate. On the surface, it’s hard to fault that logic because you have to pay the money back PLUS interest so the interest rate component should be a focus. When you have that view, nothing else matters. In fact this may well be the majority view for most Australians.
For an investor though, the interest rate is not the most important aspect of finance. Let’s see if we can discover why interest rates dominate the minds of average Australians.
If we look at what’s advertised in the media it becomes more understandable. We are bombarded with messages about saving money through sales, we are encouraged to buy the cheapest products on offer, we are told we can spend less when we buy and we listen intently when most advertisers talk about their product or price being the cheapest. Is it any wonder we apply the same thinking to finance?
To be fair, for most people, finance is a once off transaction. Borrowing and buying become blurred when the emotion of a house purchase is entered into the mix. Do Owner Occupiers think that they are buying a home loan so they should employ the same thinking to borrowing as they do to everything else? Possibly.
It follows then that borrowing the least amount of money possible would be at the forefront of a person’s mind because it’s bound up in the ‘cost is everything’ thought process. More borrowing means more interest cost so why do that? Why indeed.
Houses, cars, furniture, shares and food all have a price and we know from the old adage “you get what you pay for” that cheap doesn’t mean good. This leads on to another aspect affecting DIY finance strategies.
When cost is the focus, inexperienced investors see negotiating the interest rate and costs as the best way to obtain finance, for them. The Lender obviously looks at every loan with the view of what’s best for themselves and the borrower is incidental to this view. So if the interest rate is so important, why does the bank give it away so easily? I mean, the rate is even important to them, because it’s their income.
Think about this for a moment. Would you give up your income so quickly?
Banks have rules and regulations around how, where and when they will lend. As long as you meet those rules they will lend to you. These rules, called Credit Guidelines, are there to make sure the Bank is protected from Risk. By the way, you are the Risk in case you didn’t know it. Risk is what the Bank fears because it reduces profit if they happen to get the mix wrong. So, as a consequence, they limit the Risk by making rules about lending you money. Every Bank has these rules and regulations but there is a trick involved. They are not all the same and they change constantly.
If we accept that the sole limiting factor for any investor is access to money then surely understanding the ebb and flow of these Credit Guidelines is critical.
Negotiating this maze to get access to the most money is a job for a professional. Someone who is involved in finance day in and day out, someone who sees the changing Credit Guidelines when they happen.
A DIY finance strategy is usually based on approaching the Lender with the lowest interest rate but without any knowledge of the latest Credit conditions. A Professional on the other hand will consider all of the person’s circumstances, now and into the future, before approaching any Lender.
With that in mind, why not take some time this weekend to gather up all your information and, if you haven’t already done so, create a spreadsheet that you can update on a regular basis. Keeping track of simple things like rental amounts and repayments go a long way to demystifying cash flow performance in your investment property portfolio. Other details like the date you purchased and the price can be seen as the benchmark to calculate growth and identify available equity when combined with a current debt position. Take the time to get the fundamentals right.
We bring this up because rising interest rates are a constant source of discussion these days and how you react is a good reflection of how much control you have. There are two ways to look at your finance position.
You can be Reactionary or you can be in Control.
As you might guess, being reactionary means that you are subject to outside influences and are constantly measuring your position against any and all changes. This can be a symptom of a lack of confidence in what has been set up previously or simply just a focus on reducing cost. Either way, DIY finance strategies generally fall to the reactionary side because of a lack of a useful financial strategy.
Conversely, control is usually favoured by investors who incorporate professional advice. Finance is an area where advice can make a big difference to the growth of the overall portfolio. A logical and sensible approach to finance can mean more money in reserve to take advantage of other opportunities or to meet an unexpected emergency without stress or the need to sell.
A plan looks to provide the desired result in a given timeframe by undertaking a particular set of actions. It isn’t usually about chopping and changing positions. While DIY finance can control the action part of the process it doesn’t add to the control of the result.
When it’s all said and done, Professional advice for an investor can provide the necessary control for a desired future result.
Isn’t that why we invest in the first place?
By attending our new interactive workshop you’ll discover the Five Barriers to financial success and how you may have unwittingly included them in your own DIY strategy.