How We Are Saving 15 Years on Your Mortgage by Refinancing to a Higher Interest Rate
Interest Rates are not the only thing you should look at when selecting a loan.
We're currently on a 6.
95% fixed interest rate until May 2010.
One of the restrictions on that product is that we can only make extra repayments of $10k per year.
I did some very thorough analysis comparing our current home loan to a Line of Credit (LOC) loan at 8.
58% (a very large spreadsheet showing one row per day for the next 20 years!).
What I found was that it was possible to pay off my current loan 15 years earlier.
Why would this be I asked myself? Surely a lower interest rate is better? The way the LOC works is that your salary & rent go directly into the loan and reducing the balance for the month - so interest is calculated on the lower balance.
You use a credit card for all your monthly expenses and then your credit card gets paid directly from the LOC at the end of the month.
If after all your expenses, say you have $500 left over at the end of the month, then that $500 is taken off the principal of the loan.
Of course the more you have left over, the faster you pay down the loan.
If you are self employed and pay your own tax and super then that money can be offsetting the balance on your home loan, and then when you need to pay them, you redraw from the home loan.
You do have to be very disciplined for a Line of Credit type loan though.
If you spend what you earn then you'll still have your loan in 50 years time! However if you are good at managing your money, you'd be amazed at the savings that can be made! As a bonus, the current lender won't be charging us any break costs since they can lend the money out to someone else at 1.
5% more!
We're currently on a 6.
95% fixed interest rate until May 2010.
One of the restrictions on that product is that we can only make extra repayments of $10k per year.
I did some very thorough analysis comparing our current home loan to a Line of Credit (LOC) loan at 8.
58% (a very large spreadsheet showing one row per day for the next 20 years!).
What I found was that it was possible to pay off my current loan 15 years earlier.
Why would this be I asked myself? Surely a lower interest rate is better? The way the LOC works is that your salary & rent go directly into the loan and reducing the balance for the month - so interest is calculated on the lower balance.
You use a credit card for all your monthly expenses and then your credit card gets paid directly from the LOC at the end of the month.
If after all your expenses, say you have $500 left over at the end of the month, then that $500 is taken off the principal of the loan.
Of course the more you have left over, the faster you pay down the loan.
If you are self employed and pay your own tax and super then that money can be offsetting the balance on your home loan, and then when you need to pay them, you redraw from the home loan.
You do have to be very disciplined for a Line of Credit type loan though.
If you spend what you earn then you'll still have your loan in 50 years time! However if you are good at managing your money, you'd be amazed at the savings that can be made! As a bonus, the current lender won't be charging us any break costs since they can lend the money out to someone else at 1.
5% more!