Okay Okay so I'm not the sharpest tool in the shed
Can you help me please.
Today I have been thinking about something that appeared in Anita Bells book 'your investment property' It references the age old battle of pay of you PPOR quickly Vs purchasing investment property.
I started to play with some numbers. I pulled up the NAB loan calculator and considered my interest saving if I put in an extra $1,000 per month. The loan calculator says that I would save $120,000 and pay my loan off in 11yrs rather than 20yr… sounds good (I would work on building offset rather than loan paydown but re interest same same)
but then I think hang on 1,000 x 12 (months) x 10 years = $120,000.
So now I am left wondering WHAT AM I MISSING.
If I chose to put that 1,000 per month in an interest baring account rather than my offset for 10 years, I would earn approx 5% compounding. Now I cant tell you the answer to that because I am mathimatically challenged however I know that the answer is more than $120k. (even after I have paid tax on my earning) By the way can anyone tell me the excell spreadsheets formula to get compounding interest figures.
I know I missed something because common sense assures me that I am better to save myself 6.5% interest rather than earn 5%.
?????
Bit hard to comment without the actual numbers. Can you provide the loan amount and interest rate you are working on?
One thing that is obvious is that the calculator told you that you could pay the loan off in 11 years rather than 20. That saves 9 years worth of payments, not 10.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi JacM, thanks for being so attentive.
The numbers I was working with were a loan amount of 302,000 with interest rate at 6.54 paying and additional $1,000 per month
The "extra repayments" calculator indicates that a 25 year loan is cut to 13 years by making an extra payment of $1000 per month.
If you look at the regular calculator (not making extra payments) you will see that at the year 13 mark, there is still an amount owing of $294,721. Depressing, hey. So for the first decade or something, all you're paying is interest, before you are really starting to chip away at the principal. Anyway, the point is, at the 13 year mark you would normally still be owing $294721. If you put your extra $1000 per month into a bank account compounding at 5% (say per year for the sake of the exercise) it will grow to only $212555.80 which would absolutely not be enough to pay out the loan.
You will probably find that the home loan interest rate is higher than the interest rate on savings accounts. For this reason, you save more money by putting your money in an offset than you would in a savings account. And that isn't even talking about the fact that you'd pay TAX on money earned in interest in a savings account. It also must be remembered that home loan interest is added and compounded DAILY. Is a savings account compounding daily?
Cheers!Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
It also must be remembered that home loan interest is added and compounded DAILY. Is a savings account compounding daily?
Cheers![/quote]Sorry JacM – Isnt home loan interest calculated daily and charged monthly which is the same as most savings account calculating the interest daily but not paying until 1st business day of every month or quarter (in some cases).
Same same, I was more referring to the overall cost. When it is added wasn't really relevant to my rant
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Now put that same $1000 to an IP and do the calc's, that's how you make real dollars!!!!
JacM wrote:The "extra repayments" calculator indicates that a 25 year loan is cut to 13 years by making an extra payment of $1000 per month.If you look at the regular calculator (not making extra payments) you will see that at the year 13 mark, there is still an amount owing of $294,721.
At this point you have 12 years of 6.54% p/a on $294.721 costing you $130,974 in interest payments based on no extra repayments at $681 a week. If interest rates rise over the 12 years the interest savings could be higher.
If you made the higher payment then for 12 years you have no weekly repayment to make at year 13 and you are saving interest.
If you put the $extra repayment and the $681 a week into the bank at year 13 to year 25 or purchased an extra investment property with the increased equity – You start building wealth.JacM wrote:Depressing, hey. So for the first decade or something, all you're paying is interest, before you are really starting to chip away at the principal. Anyway, the point is, at the 13 year mark you would normally still be owing $294721. If you put your extra $1000 per month into a bank account compounding at 5% (say per year for the sake of the exercise) it will grow to only $212555.80 which would absolutely not be enough to pay out the loan.Plus you get the privilege of paying (with after tax earned dollars) tax on the 5% interest which grows each year as your savings grows.
JacM wrote:You will probably find that the home loan interest rate is higher than the interest rate on savings accounts. For this reason, you save more money by putting your money in an offset than you would in a savings account. And that isn't even talking about the fact that you'd pay TAX on money earned in interest in a savings account. It also must be remembered that home loan interest is added and compounded DAILY. Is a savings account compounding daily?
Cheers!Hee hee thank duckster and number 8.
number 8, thats exactly the calc's I am trying to do. (with not alot of luck).
I am trying to work out the $ I save (thus earn) on putting an extra $1,000 in my offset vs the $ I make (or would need to make) on an IP.
To be honest I am trying to find a way to do both (I.e. have an IP that returns at least the cost of the interest of borrowing + put my extra $1,000 a month into my offset for as many years as I can)
However I am also trying to get my head around if I can only do one which will be financially better for me at this stage.
owe.. my head is starting to hurt.
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