Question about paying off home loan faster.

[Lambretta]

I could have written more about the tax advantages of Offset, over repaying debts in the event of you turning your residential property into an Investment property or why for funding reasons banks prefer you not to have Offset accounts, but that would be overkill

 

[Lambretta]

St. George.

They're merkins, once we've paid it off I'm discharging the mortgage and going through another lender to finance our knockdown & rebuild. Nearly f**ked our finance on our first home that we built and bullshitted us and stung us with this home. Needed bridging finance between our purchase and sale though so we just stayed with them as it was easier.

If you are building, I have heard positive reports on ANZ's construction policy
That said, I've also had positive feedback on STG so it might just come down to individual experience

We banked with ANZ for years - approached them for our first mortgage and got such poor services we went with NAB. That is the only large bank I have ever banked with (I am not with them now)

 

[The Charlatan]

Charlatan

Mortgages is what I do

If you are on a variable loan with the ability to make additional payments without penalty at 3.82% you are on a reasonable deal

There is no point taking an Offset if the rate on that product is 1.5% higher - you won't make any savings

That said - it's strange that your bank has such a rate discrepancy - most banks would offer a pro pack with Offset at around that rate - including STG

Regarding your original question - does it make much difference to pay daily rather than weekly
In short - no it doesn't. It does make a very slight difference, but not that you'd notice

With mortgages, pay extra and try not to draw it back

On a $500,000 mortgage @ 3.82% (over 30 years) the monthly payment = $2,335.50 per month
Over a year this makes your repayments $28,026

Banks often (not all, but most) calculate their weekly repayment by dividing the monthly amount by 4
2,335.50 / 4 = $583.86 x 52 = $30,361.50

$30,000 is MORE than $28,000 - just making that change from monthly to weekly repayments reduces the loan term by 4 years from 30 years to 26 years - but remember it's not the frequency itself which is benefiting you, its the fact you are paying MORE

If you divide $30,361.50 by 12 you get $2,530 per month

PAY THAT AMOUNT MONTHLY AND YOU REDUCE YOUR LOAN FROM 30 YEARS TO 26 YEARS

In other words, the frequency makes f**k all difference - it's simply the additional repayment which makes the difference. There is a slight interest benefit to weekly - over a 25 year loan, it equals about 2 weeks repayments. In other words, two tenths of f**k all.

Where OFFSET differs, is that the money in your bank account reduces the interest on your mortgage.

If you run your bank account with $40,000 in it, this would save you $125 a month in interest
If your bank account runs with $3,000 a month in it, this saves you around $9.50
So the Offset benefit really depends on how much you have in your bank account

But in all honesty, if you had $40,000 in your bank account, you could pay the majority of that off your loan and save yourself the interest anyway

In other words, Offset is only really beneficial if you get it for no additional cost

Sweet Lambo, thanks for that mate.

Our mortgage is well below the median (I believe it to be around $440K?) We made a killing on our last house and basically ended up halving our mortgage. The idea is that my wife has gone back to work after two years off looking after the boy so we're going to just throw her pay on the mortgage plus whatever we save from my salary. We keep a pretty good savings buffer but I don't want to keep adding to that at the same time when we could be just smashing the mortgage.

I just had another look at St. George today, apparently you can get a discount with them through their advantage package. The offset interest rate drops from 5.22% to 4.42%.

Is it still worth trading up that 0.6% from 3.82% to utilise the interest offset, or is the only net benefit that I have access to pull money from savings whenever I like if I am in a pinch?

Interest offset stops you from copping tax on interest on your savings too doesn't it? Since you don't generally earn interest in an offset account?

 

[Eion]

Charlatan

Mortgages is what I do

If you are on a variable loan with the ability to make additional payments without penalty at 3.82% you are on a reasonable deal

There is no point taking an Offset if the rate on that product is 1.5% higher - you won't make any savings

That said - it's strange that your bank has such a rate discrepancy - most banks would offer a pro pack with Offset at around that rate - including STG

Regarding your original question - does it make much difference to pay daily rather than weekly
In short - no it doesn't. It does make a very slight difference, but not that you'd notice

With mortgages, pay extra and try not to draw it back

On a $500,000 mortgage @ 3.82% (over 30 years) the monthly payment = $2,335.50 per month
Over a year this makes your repayments $28,026

Banks often (not all, but most) calculate their weekly repayment by dividing the monthly amount by 4
2,335.50 / 4 = $583.86 x 52 = $30,361.50

$30,000 is MORE than $28,000 - just making that change from monthly to weekly repayments reduces the loan term by 4 years from 30 years to 26 years - but remember it's not the frequency itself which is benefiting you, its the fact you are paying MORE

If you divide $30,361.50 by 12 you get $2,530 per month

PAY THAT AMOUNT MONTHLY AND YOU REDUCE YOUR LOAN FROM 30 YEARS TO 26 YEARS

In other words, the frequency makes f**k all difference - it's simply the additional repayment which makes the difference. There is a slight interest benefit to weekly - over a 25 year loan, it equals about 2 weeks repayments. In other words, two tenths of f**k all.

Where OFFSET differs, is that the money in your bank account reduces the interest on your mortgage.

If you run your bank account with $40,000 in it, this would save you $125 a month in interest
If your bank account runs with $3,000 a month in it, this saves you around $9.50
So the Offset benefit really depends on how much you have in your bank account

But in all honesty, if you had $40,000 in your bank account, you could pay the majority of that off your loan and save yourself the interest anyway

In other words, Offset is only really beneficial if you get it for no additional cost

You seem to know your onions mate. A question if you could indulge me.

It seems to me that a lot of people, unlike Charlatan, will be running mortgages close to full term given the crazy cost of housing in Sydney in particular and the lack of wage growth. The 'shop around' for a new loan you hear all the time bothers me. It seems to me to be important to adjust the length of loan timeframe when considering switching lenders so they match...otherwise you'll fall for a cheaper monthly repayment but just end up paying interest forever and never eating into your actual loan amount. Is that right?

 

[Lambretta]

It's not worth paying another 0.60% for an Offset bank account

Offset bank accounts reduce interest on mortgages - they're a saving. As such they're tax free, as you can't be taxed on money you haven't paid. However, most everyday bank accounts don't pay interest so it's not like you're being taxed on those accounts.

Just make sure you pay your additional cash into your mortgage and the savings are pretty much the same as Offset.

Mortgage $450,000 with Offset account with $20,000 in it means you pay interest on $430,000
Mortgage of $450,000 - take $15,000 and pay it off the mortgage reducing the balance to $435,000 - leave $5,000 in your bank account - you pay interest on the $435,000

Remember, any amounts paid into a variable mortgage can be drawn out (this is called redraw) - check with your bank as to if there are any limitations on your redraw ie number in a year or amount that can be redrawn. Most banks now offer redraw in real time and there are no limitations on the number you can do or the amounts.

If your money is in your Offset bank account, you can access it straight away by ATM, Eftpos etc
If your money is in your redraw facility, you have to draw it back to your bank account before you can spend it. For some people this is a safeguard against spending all your cash!

 

[Lambretta]

You seem to know your onions mate. A question if you could indulge me.

It seems to me that a lot of people, unlike Charlatan, will be running mortgages close to full term given the crazy cost of housing in Sydney in particular and the lack of wage growth. The 'shop around' for a new loan you hear all the time bothers me. It seems to me to be important to adjust the length of loan timeframe when considering switching lenders so they match...otherwise you'll fall for a cheaper monthly repayment but just end up paying interest forever and never eating into your actual loan amount. Is that right?

It's definitely worth considering your loan term when refinancing

The normal mortgage is 30 years
You take out an $800,000 mortgage
Those repayments would be $3,820 per month
The interest over the full term would be $575,000

Lets say yours has been running for 5 years
After 5 years the balance has reduced to $720,000

At that point the interest you're paying is $2,400 per month
The other $1,420 is interest - so if you've made 60 repayments and the average interest component has been $2,500 then you've paid $150,000 in interest already

You refinance for $720,000 @ 3.80% and take a 30 year term - you will then pay $487,000 in interest
$487,000 + $150,000 = $637,000 - an increase of $62,000 on the original mortgage as you took the new mortgage over 30 years

The trick is to take the new mortgage over 25 years or be really disciplined paying more each month

Refinancing CAN be a good thing - but you have to be care of what you're refinancing
Always compare apples with applies

 

[Eion]

Yeah cheers mate. I'm 10 years into my loan and it doesn't matter how good a comparison rate is, when I compare with end of loan dates the same it never makes sense to move. I wonder how many are caught out by this....

 

[Lambretta]

Yeah cheers mate. I'm 10 years into my loan and it doesn't matter how good a comparison rate is, when I compare with end of loan dates the same it never makes sense to move. I wonder how many are caught out by this....

If you refinance, take your new loan over a 20 year period
If the rate is lower, then you'll be ahead

Factor in around a $1,000 to refinance (land title office, settlement, discharge etc)

What rate are you on?

You can always contact your existing lender and use rates offered by other banks as leverage to lower you own rate..

 

[Eion]

If you refinance, take your new loan over a 20 year period
If the rate is lower, then you'll be ahead

Factor in around a $1,000 to refinance (land title office, settlement, discharge etc)

What rate are you on?

You can always contact your existing lender and use rates offered by other banks as leverage to lower you own rate..

Yeah looks like I should at least try to lower the rate. I did a couple of years ago.

I've got about 20 years left on $400k. Interest rate with ing at 4.27%

 

[Lambretta]

Yeah looks like I should at least try to lower the rate. I did a couple of years ago.

I've got about 20 years left on $400k. Interest rate with ing at 4.27%

Not bad, but I think you can do better without doing much

ING Orange advantage loan with Offset
Loan amounts between $150k and $500k
Owner Occupied property
P&I repayments
3.79%

Ring up ING and ask them to adjust your rate more in line with New To Bank rates
They will have a retention team dedicated to retaining your business

Advise them that Citibank are offering 3.63% and HSBC are offering 3.59% on their pro-packs
CUA are offering 3.79% on a 3 year fixed rate

Try and aim at around 3.99% as a rate that will retain your business
It costs you nothing to ask and you don't have to refinance to get a sharper rate

Good luck

 

[The Charlatan]

Hey Lambo, one last question mate:

With St. George with the basic home loan, you have your basic weekly repayment. When you make accelerated repayments you have an available balance (AKA redraw amount,) which grows as you make extra repayments. When I view the amount remaining on my loan, the advance payments are taken into account on the balance of the loan, but in order to reduce the repayment I have to lock in the redraw amount. If I lock in the redraw amount and then continue to keep paying my current minimum repayment does that continue to accelerate the rate at which I am repaying the loan, or is it the same difference?

For example, I'm paying $335 a week at the moment on a 25 year mortgage, and at the rate I am paying it off with additional repayments I should wipe the mortgage in 5 years. My redraw amount at the moment is $6K, which only knocks about a dollar or two off the repayment. If the redraw amount was at the point where it could take $100 a week off the repayment, if I were to lock that in and reduce the minimum repayment, but continue to pay the $335 plus my additional repayments, does that further reduce the loan period? Unsure if it is just six to one and a half dozen to the other.

 

[Lambretta]

Hey Charlatan

Your minimum repayment is calculated on your limit
If you reduce your limit (and wipe out your redraw) you reduce the minimum repayment

This should only be done if you need a lower repayment. Reducing your repayment to the minimum takes the loan to its maximum term

Reducing your limit doesn't speed up the rate at which you're paying your loan at
Only increasing your repayments can do that

So in short - leave your redraw where it is (in case you need those funds) and pay more wherever possible

 

[Eion]

Not bad, but I think you can do better without doing much

ING Orange advantage loan with Offset
Loan amounts between $150k and $500k
Owner Occupied property
P&I repayments
3.79%

Ring up ING and ask them to adjust your rate more in line with New To Bank rates
They will have a retention team dedicated to retaining your business

Advise them that Citibank are offering 3.63% and HSBC are offering 3.59% on their pro-packs
CUA are offering 3.79% on a 3 year fixed rate

Try and aim at around 3.99% as a rate that will retain your business
It costs you nothing to ask and you don't have to refinance to get a sharper rate

Good luck

Cheers mate appreciate it

 

[The Charlatan]

Hey Charlatan

Your minimum repayment is calculated on your limit
If you reduce your limit (and wipe out your redraw) you reduce the minimum repayment

This should only be done if you need a lower repayment. Reducing your repayment to the minimum takes the loan to its maximum term

Reducing your limit doesn't speed up the rate at which you're paying your loan at
Only increasing your repayments can do that

So in short - leave your redraw where it is (in case you need those funds) and pay more wherever possible

Shit hot, thanks mate. Thought that may have been the case but I CBF trying to work it out...

 

[Eion]

Not bad, but I think you can do better without doing much

ING Orange advantage loan with Offset
Loan amounts between $150k and $500k
Owner Occupied property
P&I repayments
3.79%

Ring up ING and ask them to adjust your rate more in line with New To Bank rates
They will have a retention team dedicated to retaining your business

Advise them that Citibank are offering 3.63% and HSBC are offering 3.59% on their pro-packs
CUA are offering 3.79% on a 3 year fixed rate

Try and aim at around 3.99% as a rate that will retain your business
It costs you nothing to ask and you don't have to refinance to get a sharper rate

Good luck

Just letting you know ING knocked off .2%. Not quite 3.99 but close. Thanks mate...saved me a few bucks!