Pay off Mortgage or Not ?

Emotional Factor: Itch To Have Debt

Yes, a home loan or mortgage is a debt. The decision to pay off your mortgage or not, in my opinion, should not be based on emotional decision. Yes, human is emotional being, but this decision is purely based on financial knowledge. If you have a (limiting) believe that “Debt is bad” (then you need to learn about debt and leverage) or “Not having debt is always better than no having debt” (huge mistake, check all super wealthy people in the world who doesn’t have debt… zero – they are all have massive debt) – then just stop here as no matter what I or other said that will not matter already. Trust me, debt is not always bad (yes, there are bad debts) and Debt is very important tools in getting financial goal.

So, let’s go back to the original question with open mind: should I pay off mortgage or not ?

Home loan and Its Interest Rate Do Not Grow

If you have $500,000 home loan for your property. While your property can grow in value (doesn’t matter how slow or fast) — maybe increase 10% in value within 5 years, i.e: 5 years from now it worth $550,000 — the debt will always be $500,000 and decreasing if you pay the principal and interest, or it will stay the same if you only pay the interest.. Let say in this case we don’t pay the principal of the debt , just the interest.

Then if you can take a fix interest of 5% for 30 years, every year for 30 years you will need to pay 5% x $500,000 = $25,000 per year.

If you take the variable/moving interest rate, then probably it changes from 3% – 10% over times, meaning you will pay maximum of 10% x $500,000 = $50,000 per year when the interest is 10%.

Salary / Income and Inflation

During 30 years of span, inflation will eat up the value of money. That’s why $1000 10 years ago is much more valuable compare to $1000 today. With the same analogy, say if a salary of fresh graduate engineer is now $60,000, 10 years ago, it will not be $60,000 much less as somehow it will greatly determine by inflation rate.

In other words, assuming the same position and responsibility in a stable job market, income (i.e: salary) will generally go up with the proportion of inflation. For example: as Engineer you earn $100k per year. Ten years from now, will you still earn $100k? The chance is you will earn much more than that, not only because inflation adjustment, but also with the promotion in corporate ladder (if you are in business, from the growth of your business as well).

Therefore say the Engineer above buy the above property. So, with $100,000 salary per year, he need to pay $25,000 per year. The proportion is 25%. Ten years from now, say the salary is now $150,000, then with still paying $25,000 per year of interest, the proportion of the mortgage is only 17% then.

Making inflation and time your friend

This is why Robert Kiyosaki, the Rich Dad, make a remark that “Savers are Losers” : if you have debt – especially the large one, time and inflation become your best friends. Over time, thanks to inflation and increasing income, the proportion of the debt become less and less. In other words, over time, the mortgage become easier and easier. In this case: yes, maybe our Engineer a little bit struggle with $100k salary and $25 mortgage, but if it’s become $200k salary and still $25k mortgage per year, I don’t think it’s big matter anymore. It gets easier over time.

And to top it off, at the end you can actually make the bank to finally pay off this mortgage with their money. Isn’t that great?

So, What Then ?

Of course, the best use for your extra money is for investing. Do not ever consider your extra money to be used only for consumption or lifestyle – unless it’s being budgeted before. For example: you just wont $10,000 from lottery. Rather than use the money to buy new LED TV or jewelry, then it’s better to pay off your mortgage. But even better if you use the money to buy some good blue chip stock that can give you return and growth.

The simplest form of “investing” is put the money in high interest saving account, but this “strategy” is not too effective as the return is pretty low.Investing is literally a race between inflation rate and Return of Investment – as long as the ROI is higher significantly than inflation you will be ahead. And this will give you double benefit. Not only the homeloan become easier to service overtime, the passive income from investing will make your wealth come faster.

But before do investing, make sure you read this: Postpone Investing! Do this First ! . After that, there are too many “strategy” to do some investing such share trading and property investing.

So? Happy Investing, then !

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Interest: Saving higher than mortgage – a trick?

Normally, bank will offer a saving account or term deposit with interest rate less than their homeloan rate. Because this is fundamentally how a bank derive their profit (beside fee from service of course).

For example: a bank get $100 million term deposit and give customer $5million as interest with 5% rate, then they will give $100 million lending (i.e homeloan) with 6% interest and get $6million re-payment from homeloan customer and end-up they book  profit of $1 million.

But you will find sometime – for short period (“Today Only!” or “This Month only”-kind of thing) banks offer very generous interest rate for saving or term deposit account. Is this some kind of trick ? No, they are real…

Remember, for smart people: “If it seems too good to be true, check out first and don’t miss out” – only people with no knowledge and not smart will always say “if it is too good to be true, it usually it is” – do not follow them they are mediocre people that will be just that: mediocre – average.

So, the next question will be? Is it better off I put the extra money in this super high interest, or just keep it on the mortgage’s offset account ?

(btw, the reason bank offer such high interest is to lure people deposit their cash so they can boost their cash reserve/loan ratio.)

High Interest Saving vs Mortgage Offset Account

One tricky factor that need to be considered to make this comparison is the tax. As you know, income from earning interest from deposit or saving is taxable (I heard rumor that it won’t be in the future to encourage saving, but until it becomes law , this kind of interest is taxable)

So, let’s pretend we have $300,000 mortgage with 6.5% interest, and suddenly the bank (could be different bank) offer a high 8% interest online saving or term deposit. As you have $15,000 extra money (emergency cash) – will it better in offset account or in term deposit ? (Assuming your tax rate is 30%)

Offset Acc vs Term Deposit

If you just put money in the offset account, your mortgage is treated as $285,000 instead of $300k and “only” attracts $18,525 interest. Well, at the end still better than taking the high interest saving / term deposit (see table above for more detail comparison)

Of course, if the bank keep increasing the high interest saving account/term deposit, at some stage it will be more beneficial to take that instead of offset account. To calculate that threshold, just use the formula below the table (above).

At this stage the calculation will yield 9.29%. Meaning if the bank offer 9.30%p.a for term deposit/saving account then you will start to be better off taking that offer rather than leaving your extra money in the offset account.

The spreadsheet to use calculate above number (Just right click on the link and select ‘Save As’):
termVSoff.ods (Open Office’s Calc format)
termVSoff.xls (Microsoft Excel format)

Conclusion

If you want to take high interest saving/term deposit for your extra money, make sure the interest offered is higher than the threshold. Otherwise, leave it in your offset account.

Remember, One bad thing about term deposit is that you cannot take your money as you wish. In the case of emergency you will suffer a penalty to access your money.

I always  suggest to put your emergency money in account that do not restrict in when you want take it (such offset account or saving account) – although it quite prudent to have some handful under your pillow as well (not too much, though)!!

Good luck in making inform decision !

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• Kiyosaki: “Savers are Losers” – A Sad Truth with a Catch
• Offset Account: A Must Have For Your Mortgage

(If there is a mortgage product that allow you to fix  the interest rate for long period: 20 or even 30 years with very competitive fixed rate – go for it. Unfortunately not every country have that great product, they have to juggle between lower variable rate or higher fixed rate with fixed short term – before revert back to variable rate
Note= variable rate = flexible rate = adjustable rate)

Let The Number Talks

For our discussion let’s say that we have $350,000 mortgage and we are considering between a Fixed Rate mortgage (7.59% interest, $8 per month account fee) and a Variable Rate mortgage (5.91% interest with $300 per year account fee). And the bank charge $300 to switch between the fixed and variable product. We also know that usually reserved bank increase by 0.25%. (All number are real as per December 2009). This can be summarized in table below:

Just by simple calculation, the difference between the fixed rate and variable rate can be seen below:

Yes, if the rate stay where it is now for a year, if you stay in variable rate, it will save you just under $6000 for a year -or- around $490 a month. And if the rate is going down, you can save even more. But, of course no body knows for sure whether the rate will go up or down next month. The movement of interest rate is simply impossible to predict accurately. Furthermore, the bank can just raise the interest without even waiting for the reserve bank.

So, for our analysis, we will do the worst case scenario. The worst case scenario is when the reserve bank increase the interest rate every single month. On the table below, we will see what happen if the interest rate go up for consecutive 24 months, each time with 0.25% considering all the fee and upfront cost. This is what will happen:

The “saving” shown on the table is accumulative from the first month. That’s why even the monthly repayment for variable rate is already higher than the fixed rate on 8th month, since you have previous saving, it only become break even on 15th month.

In other words, basically, based on the simulation above,  you will still in advanced should you stay on your variable rate until 14 consecutive months of increases. On the 15th month you can start laughing that “Lucky, I choose the fixed interest rate!”. But before that 15 months, the variable rate still more superior.

Well, maybe you said that increase every one is a bit too harsh. OK, how about an increase every 2nd month?  Here it is:

Fix or Variable ?

You can see that the break even between Fixed Rate and Variable Rate is even further away (28 months – inserting 1 month for every increase)

The SpreadSheet

I have prepared the downloadable spreadsheet shown above that can run on your computer (No macro, no virus – I promised ). Once you downloaded it you can generate your own simulation based on your own condition. This is just a simple spreadsheet but an eye opener.

If you have Microsoft Excel, you can download the XLS file, otherwise you can have the Open Office version: ODS file. (You can download Open Office for free from the internet)

To download, right click your mouse on icon below and select “Save Link As”

Note: any cell with black background and white font indicate that you should change the value to customized to your own number. You can change all the parameter to check your specific “what-if” situation. What if the bank increase by 0.50% instead of 0.25%,what if the “gap” between fixed and variable is not that much , etc.

Conclusion

If the gap rate between fixed rate and variable is too wide, then the answer of “should I fixed my rate or keep it variable” will be “no”. The simulation will prove it to you. But your own circumstances will dictate what’s best for you, so consult with your financial planner if you are not sure. But as I always encourage people to take charge of their own financial matter, you cannot be in state of limbo and unsure of everything. Get the solution and understand it first. Maybe it will take more time, but be it. Your life, your money, your responsibility!

Have a good mortgage shopping and have fun with the simulation !

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All about Loan Serviceability

When you apply for a home loan on a mortgage, it’s all about loan serviceability. A bank or other lender only want to know whether your income can pay for the loan – in other word whether your income can “service” the loan. This is what they call as “loan serviceability”.

This is how it works. Let say if you want to borrow $500,000 with 5% interest rate and you only take the “interest-only” loan.

1. Hence you need to pay the bank $2083 monthly.
2. The bank will now taken into consideration of the living cost. They have standard table for your local city/area based on number of children, age of the children,  your marital status, etc. For example: In Sydney, family with both parents working with 2 children below 5 years old will have more expensive living cost compare to Family with boths parent working but with 2 children between 5 and 10. Well the reason is because the cost of child care is more expensive than primary school cost.
   Let say for this example the living cost is deemed to be $2500 per month.
3. Then the bank will now look into other loan: car loan, personal loan, shop card, credit card, etc. They need to know how much you need to pay/service those loan monthly. Let say your monthly obligation is $500 monthly.
4. So, total from 3 items above will be:  $5083 monthly

This is where the notion “cash flow is the king” come into effect. From example above, your income (can be combined with your spouse/parter) HAVE TO BE more than $5083 monthly or $61k per annual after tax. Some lender will prefer to have also additional safety band and add 10% or more into the calculation. But basically this is how it works. Your income have to cover this monthly commitment.

But how about if you have quite some money sitting in the bank, say: $100,000 sitting on the bank? Nope, it wont help. The amount of money you have in the bank will not affect your serviceability above, because:

1. You can spend those money without any control from the bank/lender anyway
2. Without regular income, the amount of money sooner or later will be depleted.

(You can though, withdraw this amount and make it as additional deposit so instead of borrowing $500,000 you only borrow $400,000 which in turn will reduce your serviceability criteria)

Credit Card and Mortgage

Your Credit Card Reduces The Serviceability

Some people will always pay off the monthly expense on the credit card, but some other people won’t. So, the bank or lender will assume the worse. If you are committed with the new loan that they provide and you have some kind of financial difficulties, the chances are you will max-ed up your credit card and pay only the minimum amount. So, this is the calculation that will be used by the bank.

The typical minimum amount to pay each month from a credit card will be around 2%. So every $10,000 credit card debt you will need to pay at least $200  monthly. So, in example above, as you pay 5% for the home loan, then additional $200 monthly will be equal if you borrow additional $4,000. Therefore in other words, every $10,000 credit card limit will cost you $4000 home loan serviceability. Although this example is mathematically correct, we will never know the exact calculation that the lender do when it comes to reducing the serviceability. Therefore , I would recommend this rule of thumb:

Reduce the serviceability by the same amount of the credit c ard limit.

So, if you have a few credit card with total credit limit of $50,000 then if you think you can service $500,000 home loan, then with because of this credit card limit, then expect that the bank will only allow you to have $450,000 home loan.

Even if you don’t use the credit card at all, the lender will assume you will use all of the credit. This is quite unique to credit card as for other type or fixed loan, such as car loan, if you already pay off 75% of the loan, then your “obligation” will be only calculated as only the rest of the 25% of that loan.

Things that You Can Do

There are 2 easy things that you can do to help with this issue:

1. Close the credit card that you never use. Ask for the closing statement (the one which explicitly mention in words that you have closed your account)
2. Reduce the credit limit to your comfortable level (read this article about maximize your credit card benefit before decide). Make sure to ask the statement that explicitly mention that you have reduced your credit limit.

The statement about your account closing or limit decrease is quite important. Why? The bank/lender knows that you have a credit card from other bank (from your credit history check) and you will be most likely be asked to provide the latest statement, but a change of credit limit or closure is not that obvious (they cannot really check it) – hence you just provided it for your own benefit.

Also you can do: close all of your credit card except 2 (read Benefit of having 2 (two) Credit Cards of Similar Value) and consolidate all of your credit card debt into your new home-secured loan. Remember home loan is the cheapest loan around, so maybe it’s a good ide to have them all consolidated.

As final word, remember that getting a new home loan should not change your lifestyle dramatically (you won’t survive as home loan is long term commitment). Also credit card should be just your convenience tools. So you need to balance between these two:

• don’t push it to the highest home loan possible by increasing your serviceability by closing credit card account such that you have no convenience anymore -or-
• having too much credit limit in credit card so that your home loan serviceability is too small.

Well, you decide – no one else does. Good luck !

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Mortgage is Long Term Commitment

The mortgage or homeloan is a contract to repay the debt for long term period, usually 25 years or 30 years. So, any change that you introduce in order to get the mortgage, have to be able to sustain for the duration of the mortgage. For example: if you dine out every weekend with your family, because of the mortgage, maybe you can reduce it to twice a month. But if you plan to have no more dine out just to fulfill your mortgage, you will be in trouble sooner than later.

You Need to Keep On Living, and Living Comfortably

Don't change Lifestyle Dramatically

Taking a mortgage to own your home is a first step toward better future, not the final one. Hence, you need to keep on living and still maintain your (better) living quality.  You need to maintain your quality of your living before and after taking mortgage, for example: if you eat certain brand of food, you need to be able to buy the same brand, not the cheaper with lower quality one. If you usually buy some luxurious item, maybe you can reduce the frequency, but you will still need to be able to buy that luxurious item from time to time.

The Economy Will Change Up and Down

Also, the economy will change as you go. It will go up and down, and so does the interest rate of your mortgage. Unless you are on 30 years fixed interest rate, you need to be able to serve the mortgage at least if the interest rate increase by 1% for practical guide.

For example: If you took $400k mortgage for 30years with 5% interest rate, you will be paying $2,148 monthly. If it were 6%, you will be paying $2,399.  So, it is a good practice that you need to be comfortable should you need to pay that much. At the end of the month if there is no rate increase, then you can spend the money, or better action: pay it to the mortgage as your extra repayment. Every time interest rate actually increases, you then need to re-assess your situation and be prepare to pay further 1% hike. You can use repayment calculator available online to help with the calculation, such this calculator.

The Valuation From The Bank Could Be Lower

Before the bank or any lender give you the final offer for the mortgage, they will need to do the valuation of the property that you will mortgaged. Usually the property you buy and the property that will be mortgaged (put as security of the loan) are the same property. In this case, you need to be ready if the bank give you lower valuation.

For example: with $50,000 deposit, your mortgage broker say you can borrow up to $400,000. (Total value $450,000 with LVR – Loan to Value Ratio – 88% ). Now if the valuation from the bank come up lower, say only $425,000. Then maintaining the same ratio of 88% , the bank will only lend you $374,000. With your deposit of $50k, then total money that you have will be only $424k, or short of 26$k from the selling price of $450k. If you have signed the sale contract, you need to come up with this $26k somehow or negotiate the price with seller (almost impossible as you have signed the contract). So, it’s wise not go for the maximum… give a bit of room just in case the valuation go lower.

Your Situation Could Change

You also need to be prepare if your situation change: newborn baby, job change, salary cut, emergency spending, etc. That’s why you need to achieve the financial protection level, preferably before taking the mortgage. Financial protection is where you have at least 6 months of your living cost on your saving as emergency fund.

What You Need To Do

I would suggest you do this before you finalize your purchase of the property:

1. Calculate your maximum monthly budget for the mortgage without changing your lifestyle dramatically.
2. Reduce this budget for taking a life insurance and/or income protection insurance
3. Use the repayment calculator, simulate if the interest rate is 1% higher than the current interest rate that you have been offered. Get the maximum that you can borrow here.
4. Add no (3) above with the deposit that you want to put. This will be the maximum price of property that you will buy. If you want to buy slightly more expensive property, you just need to add your deposit.

Final Words

Always remember, that taking a mortgage to own your own home is essentially a big step forward toward better future. Yes, to make it happen you might need to do some sacrifices, but that sacrifices cannot be too much different. Otherwise, not only the mortgage become a burden and source of all kind of problem, you will be pressured financially as well if something change. Have youself a bit of buffer, do not push your borrowing capacity and maintain the quality of your living (improve it will be better!).

Hope this helps !

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Homeloan/Mortgage and Other Debt

Let start with our debt. The biggest debt that we are involved with, is homeloan / mortgage. The loan itself is long term loan, usually 25 years or 30 years, and the amount is gigantic, several hundreds thousands dollar maybe.

Additionally, we will have many kind of other debt: a personal loan, business loan, car loan, and the most common one: credit card debt. These loans usually have shorter term and the total money borrowed usually less than $100,000.

So, think about them this way. Whose money are these hundreds thousands of dollar money (or more) that we owe? Well, in a nutshell it is bank’s money. Or probably in more general-technically-(more) correct term: all of those money belong to a financial institution (backed by bank or private lender). Yes, those money can be made out of nothing, but this is another matter. Technically, all those money are our liability, but they are assets in the book of these financial institutions.

Let Them Payback Their Own Money

The Bank's Money - Our Debt Money

Now the question is: how about if there is a way to make these banks or financial institutions pay off our debt. Won’t it be a very sweet revenge for you ? Of course !

Surprisingly, it’s not that difficult. It will cost us a bit of money, but the end result is exactly what we want above. How we do it ? By taking insurance.

By taking insurance, in particular life insurance and income protection insurance, as long as you are not underinsured, if something happened to you (sick, accident, death, etc) and you no longer able to produce income, the insurance will pay your cover and in turn you can use that money to pay off all the debt you left behind.

“OK, but it’s not the bank’s money, it’s from the insurance” you might protest. Let us see this. These big insurance companies (Deal only with the big one as you want to make sure they are still around when you need them the most)  are usually public listed company and its share/stock are traded in the stock exchange. Who own these stock/share? If you study them carefully, the majority of the shareholder/stockholder of these giant insurance company will be financial institution: investment banks,  managed fund, hedge fund, and another financial institution. So, the insurance money is their money as well (direct or indirectly)

Furthermore, when you study about money, you will understand that only bank can ‘create’ debt money out of nothing. So the banks is really in the middle of these money business.

In other words, these banks lent you money, you took insurance, and when you could not pay it (sick, die, terminally ill, etc), they will pay our debt (a.k.a their ery own money). Isn’t that sweet ?

Yes, it’s not free. You need to pay the premium of the insurance on regular basis but the benefit outweigh the cost. Imagine that you have $500,000 life insurance whose premium is $50 a month. These $50 per month, even you accumulate it for 30 years with 10% interest, it’s very small compare to the potential payout. Not to mention the peace of mind factor that really very invaluable and worth much more than $500,000. It’s good to remember that usually the insurance will not pay any money if the claim is due to your own fault (e.g: suicide, fired by employer, etc)

Although this strategy can be applied to any debt that you have, but you will find that taking a debt for business/investment will work the best.

How The Rich Did It and You Can Too

When it comes to borrow money to invest (business or other investment), they will choose (and you can too) to take “Interest Only” loan. It’s interest only, so the principal will never ever paid. If you borrow $300,000 for your investment house, taking “interest only” loan, 30 years later, the debt will still be $300,000 not a cent less. By using this way, there are some advantages:

• After 30 years, the value of $300,000 will be much less because of inflation. In other words inflation becomes their friend.
• They have certain asset protection as the asset (investment house or stock or anything else) is mortgaged to the lender, so technically they don’t own the asset, although they have total control the asset. If they don’t own the asset, then somebody else cannot really sue them for that asset, isn’t it ? That’s why the rich loves debt. They control not own.
• The interest paid to serve the loan is usually ‘cost of business’, hence, tax deductible.
• The extra money that they would pay if they took “principal and interest” are invested to make them even richer.

Conclusion

The main point of this article is NOT about “no need to pay your debt”. The most important point is that when you do business/investment, taking debt (even a large one) is one big alternative. By taking proper insurance, you don’t even have to worry about the debt in case somnething happen to you, just use it to make you more money.

So, as final words:

• If you have debt, especially homeloan/mortgage, it’s only logical for you to take insurance. Life insurance and Income Protection insurance to be specific. Read further info here: Protect Your Financial Life: Insure Yourself, Income Protection: Your Salary Cover In Need
• Consider taking “interest only” loan when doing business to take advantage of its potential. Have a sweet revenge! But read this beforehand: Be Careful With “Interest Only” Loan: a Potential Problem You Should Know

And as always, please remember, do not take debt to finance your lifestyle or for consumption (read more) . Only take debt for money making activity (business and investment) – read more.

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How It Works

As the name implied, if you have offset account, amount of money that you put on that account will offset / reduce the actual homeloan. For example: say you have $300,000 homeloan and it has offset account linked to this homeloan. Then if you put $10,000 inside that offset account, the interest of your homeloan  is no longer $300,000, but it’s now $290,000.

So, with interest of 6%, amount of $10,000 above will save you interest payment of $10,000 x 6% = $600. So, it doesn;t matter if the company charge you $250 per year for that facility, you still end up with more saving.

But of course you will not find this facility on fix term interest rate mortgage as it has fix repayment as well.

What is The Benefit

The actual benefit is enormous. Let say you won a small lottery prize of $5000 or your employer give you a bonus this month fr $5000. Well, the general wisdom will be to try to pay off the mortgage as soon as possible, so you are considering this $5k for extra repayment for the mortgage. But… you also remember that you need to have emergency cash for financial protection that can support you for rainy days. At the moment you hardly have this ‘emergency’ saving. So, you’re also considering this option to put the amount aside for emergency purposes.

Well, if you don’t have offset account facility, you will end up with splitting the amount. Maybe $2500 for extra mortgage repayment, and the other $2500 will be put aside for emergency. Or any other composition you think the best.

But now, if you do have offset account, you simply put that extra money into this offset account. And not only you will reduce the calculation of the interest by $5000 (the exact same effect if you pay extra $5000 into the homeloan account), but also you can make the money (all $5000) as your emergency cash, as the offset account is usually just another saving account that ‘linked’ to the main homeloan account.

So, just by having this facility you virtually ‘doubled’ your money: $5000 for extra mortgage ‘repayment’ and another $5000 for part of your emergency money.

A Few Tips

Other tips that you can do if you have offset account:

• Ask you employer to transfer the salary directly to this account. As you know the interest payment calculation is based on daily balance. If the salary or other payment is transferred directly to this account, there will be 1 or 2 day that the full amount of that transfer being used to offset the mortgage (before you use most of the amount to pay other bill). In this case, you really maximizing the saving on the interest.
  For example: if your $1500 salary is paid fortnightly (hence 26 occasions), assuming interest rate is 6%  and each of the occasion it sits there for 2 days, then you make yourself roughly a saving of $1500 x 6% x (26 x 2)/365 = $13. Well, not much, but it did not cost you a cent to make this saving, so it’s still a good saving.
• Make sure your annual fee is being “paid” by this offset account facility. For example: if you have $250 yearly fee and 6% interest, then your need to put in the account at least $250 / 6% = $4167 for the whole year. If you do that, the saving of the interest repayment will be greater than the annual fee that they charge. In other word, technically you have “free” annual fee.
• Pay your monthly credit card bill and other bill just 1 or 2 days before the due date. Make your money stay as long as possible in this offset account. Remember there is no reward if you pay the bill 1 week in advance, but if you put the money in your offset account, that 1 week give you additional saving for the next interest repayment.
• If you have a social gathering or similar occasion in restaurant or cinema or anywhere else, volunteer yourself to pay collectively (while the other pay you the cash) with your credit card. Then put the cash on your offset account. When the credit card is due, pay it off as usual. Not only you will earn more point on your credit card, but you have additional saving on your mortgage.

What To Do

If you currently don’t have offset account facility, just try to call your lender whether they can easily add this facility immediately even for a small fee. Otherwise, make sure you have this one on the next refinance / remortgage.

If you have one, then make sure you reap the maximum benefit as suggested above.  Well, at least make your annual fee of the account “free”.

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The Interest Only Period is Limited

This problem starts with the fact that “interest only” loan offer only limited period (for example: 3 years or 5 years) of the interest only repayment. After that period the repayment is reverted back and calculated based on principal and interest. And because of this you will have a jump (a very significant one) on your monthly repayment.

Let see the example: provided you have mortgage of $300,000.  if you pay “Principal and Interest”, with 6% interest and loan for 30 years your monthly repayment will be $1798.

Now, as comparison with “interest only” product for the same 30 years loan and 6% interest, your repayment will be only $1500 per month, A cashflow saving of around $300 per month, a quite significant amount. This is where if you’re investor, this $300 extra per month could be used for other investment purposes, for example to repay a loan of  other investment property or share/stock portfolio.

The problem is after 5 years, when the “interest only” period has elapsed, the repayment of your loan will be based on “Principal and Interest” and 25 years loan (since 5 years has elapsed) and furthermore, your principal is not a cent less. Provided the interest rate is exactly the same (6%), then the repayment will be $1933 per month.

You will find a big jump of $433 for your monthly repayment. This is normal and just a by product of this “interest only” product, so you don’t have to be alarmed, you just need to be fully aware what’s going to happen when the interest only period have expired.

You need to incorporate this to your budget. If your budget permit and you are happy to just continue the loan, then you may decide so. But if additional $433 on monthly budget put quite significant chunk on your cash flow, you need to be prepared and do something about it.

What to do

Since you know what’s going to happen, you can do the preparation and planning. What you need to do is to have your homeloan/mortgage refinanced or re-mortgaged at the end of the interest only period and extend it back to 30 years and also have another “interest only” period should you want to. This is just a bit of hassle that you need to do every 3 or 5 years (depends on your interest only period). The most important thing is you need to re-assess your situation and economy in general. Maybe at that time the interest rate is in historical low and maybe it’s more beneficial to make the loan have fixed interest rate. Or the other way around that the interest rate is so high and maybe more profitable to sell the property. In short, don’t do just extend or refinance your loan without really asses the situation.

Now, you may want to calculate the real number that you have here: mortgage repayment calculator.

Happy Planning !

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• Mortgage: Change To Fixed Rate or Keep It Variable ?

The Overall Process

1. Based on your income, debt, current situation and history, the lender or its agent will determine how much you can borrow and give ‘conditional approval’
2. You go for home hunting: aim a property with price at least 10%-15% cheaper than the maximum given by lender.
3. Once you found one, you need to take the property off market because you have reserved that property, so during the process no body else can buy that too.
4. The solicitor/conveyancer of both side (buyer and seller) will exchange the contract and review all the clause within the contract
5. The lender then will do valuation. If the selling price is less than the valuation you’re good to go, if the valuation is less than selling price this is a problem: you need to come up with the difference or find some other property
6. At the same time you may need to arrange some additional inspection to determine the quality of the building: building inspection , pest inspection, etc
7. Once satisfied with the valuation, the lender will give you a big pack of ‘Loan Offer’ which is the contract of the loan, all  term and condition.
8. You sign the contract and you got your self a home loan
9. Then finally there will be settlement date where the lender give the money to seller, the seller give the title of ownership to the lender (lender will hold it as security) but give the key to you.  From this date on, the property have been yours mortgaged to the lender…
10. You start repay the home loan on monthly or fortnightly time frame

What You Need To Do

1. Get yourself a good mortgage broker (Read here: Why You Should Always Use Mortgage Broker For Your Homeloan) and good conveyancor/property solicitor.
2. Prepare your paperwork: official ID/password, credit card bill, term deposit statement, share/stock  holding statement, personal loan statement, car loan, saving account statement, statement from your employer or tax return if self employed
3. Go meet your mortgage broker: he/she will advise you what the maximum property that you can buy, potential lender(s) that will give you a home loan, etc
4. Go find a good property that you like within your budget
5. Once you found one: contact your conveyancor/solicitor, contact your mortgage broker. You have to tell the real estate agent to take the property off the market. Usually you only need to give small deposit: $1000 or even $500 cash. But this is highly depended on the custom of the real estate agent. Just ask.
6. Additionally you might need to arrange some inspection: building inspection, pest inspection, etc – ask your conveyancer/solicitor when you can do this – the seller still need to determine this.
7. Wait until the lender give you offer and sign it.
8. You have bought yourself a home.

See, not that hard, isn’t it ?

Related Posts

• Why You Should Always Use Mortgage Broker For Your Homeloan
• Taking a mortgage ? Do Not Change Your Lifestyle Dramatically
• Offset Account: A Must Have For Your Mortgage
• Be Careful With “Interest Only” Homeloan/ Mortgage: a Potential Problem You Should Know
• Mortgage: Change To Fixed Rate or Keep It Variable ?

Why We Need A Mortgage Broker?

1. Contrary to popular belief, deal directly to a bank or lender will not get you cheaper home loan. Why? Mortgage is highly competitive market and commission based. Even you directly go to the bank, the employee that serve you will be the one receiving commission.
2. Mortgage Broker allows you to compare directly among various of product and lender and then make a (close) match to the best available product that he/she carries into your need/situation in very efficient and fast manner. This will save you tremendous time avoiding the trip to every single bank or lender that you want to inquire (even if it’s only their website). They also will know which lender give “discount rate” or any other special offer at that time.
3. Mortgage or home loan transaction is not simple and straight forward. Many nitty gritty that we don’t want to know about (and we don’t need to) that can be resolved without any doubt if you have a mortgage broker. Simple example: how much exactly you need to prepare for the settlement? This can be a very tedious exercise if you want to do it yourself. You don’t want a simple innocent thing become big problem just because you are not sure about it. As illustrated below, without mortgage broker, it’s only you and your solicitor/conveyancer that deal with the rest of the flock. Having one additional army is always nice to have.
4. Mortgage Broker will help you tremendously with all the paper work and forms that you need to fill. Some of those form is as cryptic as it could be.  Having someone that really help you with the paperwork will prevent you to become overwhelm with the whole process.
5. It’s “free” service. Your mortgage broker will receive some commission and usually residual payment as long as the loan is still be maintained, but you should not be charged for their service. If you have been charged then your mortgage broker is “double dipping”

What’s the criteria of Mortgage Broker ?

Having recommend a mortgage broker, I then need to give you a hint how to select a mortgage broker:

1. Your mortgage broker should not be employee of a bank/lender. In other words “independent” mortgage broker.
2. Your mortgage broker carries a lot of product from various lender
3. Your mortgage broker should be member of the official body.
4. You are comfortable with him/her. Remember after the inquiry, he/she will know your exact financial situation. If your gut feel say no, just find another one.

Recommendation

1. Make a good relationship with a mortgage broker. If you don’t have one, ask friend or just go to the mortgage broker shop and when you find some one that your feeling said he/she is alright, stick with him/her.
2. But every time you want to engage to a new loan or refinance/remortgage, always go to at least 2 mortgages broker to get the better market selection of product at that time.
3. Every 2 or 3 years, make your regular call to your mortgage broker to review the market… Maybe it’s the time to refinance/remortgage….

OK, hope this helps and maybe it’s time for you to check your home loan!

Related Posts

• Getting Your First Home Loan or Mortgage: Not That Hard!
• Taking a mortgage ? Do Not Change Your Lifestyle Dramatically
• Offset Account: A Must Have For Your Mortgage
• Be Careful With “Interest Only” Homeloan/ Mortgage: a Potential Problem You Should Know
• Mortgage: Change To Fixed Rate or Keep It Variable ?