Hi guys,
Just recently got into the property market with a 2 bedroom townhouse in Marsfield, Sydney.
Some stats on the loan below:
Loan = $448k
Rate = 4.94% pa
Type = P&I with Redraw
Strategy = Automatic Monthly repayments + Extra manual repayments
Now, the problem I'm finding is that the interest paid every month is fluctuating as show in the image attached
What I don't understand is, why is interest paid more than the month before if the mortgage balance is actually lower?
Isn't interest calculated based off the loan balance?
If anyone can confirm the following:
Interest is calculated daily, so I need to be making payments more frequently to keep interest low?
So for example, if I have 5k a month to pay manually towards the loan, I should spread it weekly as opposed to just one lump sum payment at the beginning of the month?
The 1st November one is higher because October is a 31 day month. The other 2 are 30 day months (so 1 less day of interest).
Yes interest is calculated daily. If you have the (say) $5,000 early just stick it all on. If you get paid weekly, pay weekly. It doesn't make much difference really. The thing that does make a difference is paying fortnightly instead of monthly. The major gain comes from the fact that you are paying 26 1/2 payments instead of 12 whole payments so you have an extra payment each year.
If there is ANY chance that you will make this an investment property in the future STOP making extra payments.
Get a loan with an offset (NOT a redraw) and put extra money into that.Can save MANY thousands of dollars later on.
Catalyst wrote:If there is ANY chance that you will make this an investment property in the future STOP making extra payments.Get a loan with an offset (NOT a redraw) and put extra money into that.Can save MANY thousands of dollars later on.
Do it anyway as no harm done if you never convert to an IP and much if you do!
Just looked at the statemant and looks like it is already an IP as rent payments are recorded?
Colin Rice | CDR Finance
http://cdrfinance.com.au/
Email Me | Phone MePerth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]
sanasar wrote:What I don't understand is, why is interest paid more than the month before if the mortgage balance is actually lower?
As catalyst said -the simple answer is the number of days in the month. You'll be happy when the Feb repayment comes around
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks so much for the responses! Makes sense regarding calendar days!
The thing I still don't understand is how the interest for September is lower than the interest for November?
i.e both are 30 day months, and when you get to November the loan balance has decreased by 10k yet still has higher interest.
Should I be taking my 5k and splitting it into 2.5k fortnightly payments?
To answer the other questions, yes currently renting but only for a year. It will become our PPOR in May.
The redraw facility acts as an offset account, as all our income will go to this one account. If all our money is in this loan, then less interest to pay etc
It's a different strategy, but achieves the same thing yes?
You will find that the interest for November was recorded on the first business day of the month of December which was the 2nd so it has included one extra day.
Redraw and offset are totally different things and are used strategically in different ways. If you ever intend having a long term view of renting out the property down the track after living in it, then you really do need an offset as your current setup will lose out later on.
Cheers
Tom
You are incorrect here. An offset account is completely different to redraw. You could be creating a very messy and costly situation by using redraw.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:You are incorrect here. An offset account is completely different to redraw. You could be creating a very messy and costly situation by using redraw.I suspect sanasar may have been given incorrect advice at branch level in regards to offset v redraw as they will tell people it is the same thing?
I had a bizarre conversation with a branch staff member just yesterday when one of my clients went into a branch to transfer IP funds from a PPOR offset back into the redraw of the IP loan. She said what I was doing was "very strange". I attempted to explain contamination of funds to her after she asked why I wanted to transfer the funds back to redraw but she was not interested in the answer. One staff member at a previous branch she visited the same day refused to do it as it 'wasn't necessary to move the funds as she was offsetting interest on her PPOR therefore it balanced itself out!" What the!!!!
Not one for bank bashing as I see them as business partners but the general ignorance is astounding. I guess you don't know what you don't know but then hearing the correct strategy and not being interested in the answer is what perplexes me even more so.
Colin Rice | CDR Finance
http://cdrfinance.com.au/
Email Me | Phone MePerth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]
FMS wrote:Terryw wrote:You are incorrect here. An offset account is completely different to redraw. You could be creating a very messy and costly situation by using redraw.I suspect sanasar may have been given incorrect advice at branch level in regards to offset v redraw as they will tell people it is the same thing?
I had a bizarre conversation with a branch staff member just yesterday when one of my clients went into a branch to transfer IP funds from a PPOR offset back into the redraw of the IP loan. She said what I was doing was "very strange". I attempted to explain contamination of funds to her after she asked why I wanted to transfer the funds back to redraw but she was not interested in the answer. One staff member at a previous branch she visited the same day refused to do it as it 'wasn't necessary to move the funds as she was offsetting interest on her PPOR therefore it balanced itself out!" What the!!!!
Not one for bank bashing as I see them as business partners but the general ignorance is astounding. I guess you don't know what you don't know but then hearing the correct strategy and not being interested in the answer is what perplexes me even more so.
I would suspect you are right!
Bank staff cause the majority of the tax problems with investing that I see.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:How would I be doing this? Please explain. Obviously I don't know as much as you guys so please help me out.
My situation is as follows:
1. Getting married in May (redraw helps with any expenses that may come up)
2. The property is an IP until May when we move in and it becomes our PPOR
3. We went to a mortgage broker, not a bank and he recommended this loan highly
4. The main thing we said to him is that we want to make voluntary payments as we expect to pay this loan off in 7-10 years
Sounds like your broker has given you what you asked for. It is not wrong, but could have been set up more effectively I think. However, if this property were never to be rented out it won't matter too much. You are only disadvantages in the relatively short time before you move in, and even then probably not much.
But, if there is a slight chance that this property may one day be rented out again then consider a IO loan with a 100% offset account.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Agree with what has been said already.
Poorly structured loans cause so much work going forward and are the biggest killer when it comes to potential lost interest deductions.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Agree with what has been said already.Poorly structured loans cause so much work going forward and are the biggest killer when it comes to potential lost interest deductions.
Cheers
Yours in Finance
YEP!!!!
The November 1st interest is for October (31 days). The October 1st interest is for September (30 days).
Amend- the extra day probably as the Dec one was taken on 2nd, not the first as the others.
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