Mortgage repayment question.

[scotty13]

Hi brains trust.

Question regardingortgage rate repayments should there be an interest rate decrease or increase at some stage in the next 20yrs.

I currently have a mortgage at about $250,000 remaining.
The time left on the loan is 28 odd years, however due to offset and extra payments the forecaster term is 24yrs until paid off.

My question, should there be a .25% decrease in the rate how would this be calculated for repayments?
A) $250,000 at the new rate over 28yrs
B) $250,000 at the new rate over 24yrs
C) Original loan amount at the new rate over 28yrs
D) Original loan amount at the new rate over 24yrs
E) Other

Thanks, it will assist me with budgeting for next year

 

[Simon_Nesbit]

Hi brains trust.

Question regardingortgage rate repayments should there be an interest rate decrease or increase at some stage in the next 20yrs.

I currently have a mortgage at about $250,000 remaining.
The time left on the loan is 28 odd years, however due to offset and extra payments the forecaster term is 24yrs until paid off.

My question, should there be a .25% decrease in the rate how would this be calculated for repayments?
A) $250,000 at the new rate over 28yrs
B) $250,000 at the new rate over 24yrs
C) Original loan amount at the new rate over 28yrs
D) Original loan amount at the new rate over 24yrs
E) Other

Thanks, it will assist me with budgeting for next year

Short answer is "e" - depends on which lender and what you ask them to do. Most lenders would be closest to "C" IMO.
Generally the important factor in your minimum repayment is LIMIT, TERM, and RATE. The Balance doesn't actually matter - you can take the redraw out and it won't affect your repayments.

CBA are different (they use Balance, to maximise their income minimise your repayment obligation) - no doubt others too.

If you are ok with the current repayment, I would strongly encourage you to keep making that repayment amount even if rates do come down.

If you use savings/extra repayments/etc to reduce your home loan, you save ~6% in interest costs.

If you are on an average wage (45-135k), you're paying 30% marginal tax rate - so even if you were to get an 8.5% return on your investments - 6%/(100%-30%) - with ZERO risk - you are still coming out behind just putting it off your mortgage.

...

While I'm at it, two bits of important repayment information people often don't comprehend.

1. TIME matters. Interest is only added monthly, but it is calculated on the balance EVERY DAY.
   • The sooner you can put your money into the loan (or offset), the better.
   • Don't pay weekly/fortnightly if you are paid monthly - it means you are holding the money and actually DELAYING the repayment. As soon as you get paid, put it in the loan.
2. Weekly/Fortnightly/Monthly schedule DOES NOT MATTER.
   • The reason so many people think it matters is that they are being FORCE to pay MORE off their loan.
   • 12 months, but 26 fortnights (52 weeks). Most lenders simply divide the Monthly payment by 2 (fortnightly) or 4 (weekly) for their convenience.
   • You can achieve the exact same by simply increasing the repayment to what you want
     • Paid salary Monthly? Pay Monthly, but increase the repayment to 108.33% of your minimum to achieve the same extra repayment as weekly/fortnightly payments.
     • Better yet, just keep 'rounding up' the repayment until you get to the point you are committing 100% of your salary each week.
       • If you cannot afford to make repayments 110-120% of your minimum without stress, you very likely overcommitted.

 

[scotty13]

Short answer is "e" - depends on which lender and what you ask them to do. Most lenders would be closest to "C" IMO.
Generally the important factor in your minimum repayment is LIMIT, TERM, and RATE. The Balance doesn't actually matter - you can take the redraw out and it won't affect your repayments.

CBA are different (they use Balance, to maximise their income minimise your repayment obligation) - no doubt others too.

If you are ok with the current repayment, I would strongly encourage you to keep making that repayment amount even if rates do come down.

If you use savings/extra repayments/etc to reduce your home loan, you save ~6% in interest costs.

If you are on an average wage (45-135k), you're paying 30% marginal tax rate - so even if you were to get an 8.5% return on your investments - 6%/(100%-30%) - with ZERO risk - you are still coming out behind just putting it off your mortgage.

...

While I'm at it, two bits of important repayment information people often don't comprehend.

1. TIME matters. Interest is only added monthly, but it is calculated on the balance EVERY DAY.
   • The sooner you can put your money into the loan (or offset), the better.
   • Don't pay weekly/fortnightly if you are paid monthly - it means you are holding the money and actually DELAYING the repayment. As soon as you get paid, put it in the loan.
2. Weekly/Fortnightly/Monthly schedule DOES NOT MATTER.
   • The reason so many people think it matters is that they are being FORCE to pay MORE off their loan.
   • 12 months, but 26 fortnights (52 weeks). Most lenders simply divide the Monthly payment by 2 (fortnightly) or 4 (weekly) for their convenience.
   • You can achieve the exact same by simply increasing the repayment to what you want
     • Paid salary Monthly? Pay Monthly, but increase the repayment to 108.33% of your minimum to achieve the same extra repayment as weekly/fortnightly payments.
     • Better yet, just keep 'rounding up' the repayment until you get to the point you are committing 100% of your salary each week.
       • If you cannot afford to make repayments 110-120% of your minimum without stress, you very likely overcommitted.

Yeah we were planning to make the same or similar repayments we are now even if there was a drop... but if it were to drop by a cpl hundred $ (option a) then we would have split... half on the loan half on a holiday... but we can still do that by putting the money in an offset.

Thanks.

 

[Teagueeee15]

It’s also worth keeping an eye on your current rate and the rate being offered to new customers at your bank.

It will slowly drift away and likely once rates start dropping, you will find yourself only dropping by 0.2% while the new customer rate gets the full 0.25% drop.

Every 6 months you should be looking to request a rate review through your lender and if they don’t play ball, just refinance away.

 

[burge13]

I've changed lenders 4x on my loan so far and 3 of the refinances came with cash back offers from the new lender for a total of $11k...

Always shop around

 

[Mofra]

It’s also worth keeping an eye on your current rate and the rate being offered to new customers at your bank.

It will slowly drift away and likely once rates start dropping, you will find yourself only dropping by 0.2% while the new customer rate gets the full 0.25% drop.

Every 6 months you should be looking to request a rate review through your lender and if they don’t play ball, just refinance away.

Yep - or you can just ask for a discharge form and the customer retention unit calls you. Every lender has one.

 

[Happy Mastenator]

The big one for me at the moment is to focus on repaying the mortgage as much as possible.

Unless rates drop to ~2/3% again, the value of putting money into other investments instead just doesn't appear to be there, given the marginal tax rate at the top end is 47% (when including Medicare levy), with rates at ~6% you need to be making ~12/15% to make it worthwhile (a bit less if its capital gains and you get the capital gains discount on it).

A dabble in crypto / some other high risk high return investment notwithstanding.

If you're paying the highest tax rate, you're also putting a stack into super, so you already are getting the benefit of share market performance, in a tax protected investment vehicle (access constraints not withstanding).