calculating mortgage interest

[ramblin]

If I have a spare $5000 for the time being is it worth putting in my mortgage account for 28 days of the month to save on interest?
Say the loan balance is $50k and so the $5k can put it down to $45k but for only 28 days of the month.

Alternatively if the interest is calculated on the 9th of the month and the $5k has only been in there for 9 days does this make any impact?
I guess my question is about how does interest get charged - is it daily and all the daily amounts add to a monthly charge or is it based on the balance on the payment date only?

For the sake of this question assume offsets and any other alternative arrangement is not possible. I am purely asking about a temporary deposit only.

Thank you!

 

[Peter_Tersteeg]

Interest on every home loan that I can think of is calculated daily. Unless there's somewhere else that will have a better return, the best place for some extra cash is usually on the mortgage (preferably via an offset account).

 

[Terry_w]

If I have a spare $5000 for the time being is it worth putting in my mortgage account for 28 days of the month to save on interest?
Say the loan balance is $50k and so the $5k can put it down to $45k but for only 28 days of the month.

Alternatively if the interest is calculated on the 9th of the month and the $5k has only been in there for 9 days does this make any impact?
I guess my question is about how does interest get charged - is it daily and all the daily amounts add to a monthly charge or is it based on the balance on the payment date only?

For the sake of this question assume offsets and any other alternative arrangement is not possible. I am purely asking about a temporary deposit only.

Thank you!

Generally it would be worthwhile. But think about the tax consequences.

Why not just set up with an offset account so that you will be saving daily interest without putting money into the loan.

 

[Paul@PFI]

My "savings" account is an offset account against my home loan. As mortgage interest in calculated on daily balances each $1 each day in the "savings" equates to an interest saving on the loan....ie I avoid paying say 7% of non-deductible loan interest rather than earning 0.01% or whatever crap rate they pay and then pay tax on it.

Using an offset as Terry already said is far better than credited the $1 to the loan and redrawing it. This behaviour can taint the loan if for example in future years you were to lease your home. Think of each redraw as a reduction in the deductible amount. So imagine you originally borrowed $100k. After crediting $20K a year and redrawing it you can see it doesnt take too many years for the $100K to lose its deductibility. Using an offset avoids this tainting.

I once had a client who had an IP with a large mortgage. He was made redundant and temporarily parked his large payout into that loan to save interest. A week later he redrew the loan. He was shattered to learn he just tainted the loan and it permanently lost tax deductibility without anyway of correcting it. The redraw of the loan wasnt to buy the IP..Only the original loan had that purpose. So his redraw was non-deductible.

 

[ramblin]

Thanks for the responses. I only have it spare for a few months so not worth setting up an offset but I get what you said Paul about the constant ins and outs.

 

[Peter_Tersteeg]

ramblin where does your salary go to if not to an offset account? It's a rare occurrence that an offset account doesn't benefit someone.

You haven't stated that if the mortgage is for your own home or an investment property. If it's for an investment property you may contaminate the tax deductability by putting the cash directly onto the loan (and redrawing it later).

 

[ramblin]

my salary all goes into the mortgage and we live off my husbands down to the cent with everything extra going into the mortgage. our lifestyle is pretty simple so money is either used straight away or into the mortgage
the mortgage i was going to park money into was our PPOR

 

[Aaron_C]

You should still set up the offset account. The way you are doing it is you are creating a redraw nightmare if you start investing in real estate.

 

[geoffw]

Interest on every home loan that I can think of is calculated daily. Unless there's somewhere else that will have a better return, the best place for some extra cash is usually on the mortgage (preferably via an offset account).

Many years ago I needed to calculate the interest on an account to the cent. I found that it was based on 1/365 of the minimum daily balance- even on leap years. So they got free extra interest on February 29.

 

[fullylucky]

If I have a spare $5000 for the time being is it worth putting in my mortgage account for 28 days of the month to save on interest?
Say the loan balance is $50k and so the $5k can put it down to $45k but for only 28 days of the month.

Alternatively if the interest is calculated on the 9th of the month and the $5k has only been in there for 9 days does this make any impact?
I guess my question is about how does interest get charged - is it daily and all the daily amounts add to a monthly charge or is it based on the balance on the payment date only?

For the sake of this question assume offsets and any other alternative arrangement is not possible. I am purely asking about a temporary deposit only.

Thank you!

Assume your interest rate is 5% p.a.

just go $5000 x 0.05 / 365 = daily saving on interest.
times 28 = how much you saved in total.
you saved around $19. so it's worth your time to just transfer it in. no harm in doing it unless the time it takes you to transfer is more valuable than $19.
(interest is calculated daily and charged monthly, so don't need to over think it. each day the $5000 would incur additional 68c.)

and yeah what everyone else said is right, you should contact your bank and arrange to have an offset or MISA account created to offset your loan. unless you went with homeloan product that doesn't offer offset feature.

 

[Colin Rice]

calculated daily and charged monthly is the norm.....