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Ben Kingsley

10/07/2011
Blog post by Ben Kingsley

Financing for Cash flow

Cash flow is at the heart of any household or business and in almost all cases the lack of cash flows is their downfall, because they technically become insolvent.

There are several ways in which structuring your financials/debt can help from a cashflow position for households. Here are a couple of examples that will assist in building your knowledge of debt management.

Example 1

The most logical way in which you can release more cash flow into the household is to revert your loan to an interest only position for a period of time.

Example: A household with a mortgage of $350,000 have seen interest rates and the cost of their utilities rise significantly over the past 18mths to a point that their household budget is very tight from month to month. Currently they pay a Principal and Interest repayment of $2,401but if they

switch their loan to interest only their monthly repayment will be only: $2,070 per month – a cashflow saving each month of $331. This money will go a long way in the short term to keep the household afloat and ensure they don’t fail to pay any outstanding commitment, as this will affect their credit file if they don’t meet their commitment. When they get into a better financial position they can still keep the loan interest only, but opt to pay a greater amount on their loan or into their offset account.

 

Example 2

Resetting your loan term is another way of reducing your commitment and free up additional cash flow, this can be a very good strategy to increase any surplus cash flow which may then assist in helping that household secure an investment property to assist in building their wealth sooner.

Example: A household have a mortgage of $140,000 with 13 years remaining on the term. Their current repayment is $1,317. If they were to refinance this loan back to a 30 year loan term their repayments will be reduced to $940 per month (even less if they went interest only instead of P&I). Once again this releases an additional monthly surplus of $377.

 

IMPORTANT MESSAGE: As illustrated in the examples noted above, before you take either of these two options up, you must understand that paying no or less principal on your loan, means you are going to pay a greater amount of interest over the life of that loan, so the benefit of doing so must be greater than the additional costs of this money/debt.

Debt management can be a great way to improve cashflow, which can help with the greater good for your household. Any one of our licensed Finance Advisors can help explore your situation to see how restructuring your finances can help you.

 

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