Optimising your mortgage

[mgs4]

My partner and I are analysing how we can most effectively reduce out mortgage. We have a $520k mortgage which is $130k variable with a linked offset account and $390k fixed. Our offset account has almost offset the variable loan. Once we have $130k in the offset we can put another $30k in the fixed loan to reduced interest payable, however if we go over $30k we are charged partial break fees.

Our variable and fixed are about 5%, break fees on the $390k fixed are approx. $4.6k, we could do a partial break and pay partial break fees but I don?t know if that?s effective. There?s about 2 years 4 months left on the fixed rate loan.

What are some good options to pursue in our circumstances?

 

[The Fence]

Borrow more for renovations or IP acquisitions and have the extra equity drawn as variable and offset that.

Money makes money.

 

[Peter_Tersteeg]

How quickly are you saving money? I presume you're about to exceed the $30k limit?

Beyond that, there's probably not much you can effectively do than put the money into something with a reasonable return until the fixed rate expires.

 

[mgs4]

How quickly are you saving money? I presume you're about to exceed the $30k limit?

Beyond that, there's probably not much you can effectively do than put the money into something with a reasonable return until the fixed rate expires.

Thanks for the feedback. We're getting close to offsetting the $130k variable through the variable account, and can then contribute to the fixed loan amount. Would be a few months until the $30k is fixed.

Might have to find high earnings savings account or comparable assets, then perhaps re-finance when the break fee has gone down.

 

[Terry_w]

depending on the circumstances you may be better to put the excess cash into a high interest savings account.

or

Use it to acquire another one - with appropriate strategies in place to retain the funds as well for non deductible debt.

And, next time consider a bigger variable portion.

 

[Rolf Latham]

Speak to a decent planner that can help you debt recycle the bad debt while acquiring more growth assets

Ta

Rolf

 

[Redom]

You can do a quick comparison between the two options.

Assuming you pay 5% on your mortgage, that is the return you'll receive on your additional savings.

If you put it in a high interest savings account, you'll get around 4%. It's likely that it'll get taxed, depending on your situation of course. Given that, you're likely to earn sub 3%.

So assuming the difference is 2%, apply that figure to your additional savings figure X 2%, until it is greater than the break fee. If the break fee is around $4000, you may need $200,000 in additional savings before it makes sense to break your mortgage.

Simplistic analysis of course...you've got plenty more options.

 

[Jamie M]

Working out how much to leave variable is hugely important when splitting up a loan into fixed/variable.

I usually ask clients to work out how much they think they could possibly save during the fixed period - and then adding an additional buffer on top of that to come up with the variable amount.

It's a terrible first world problem having more money in the offset account than the loan limit

Cheers

Jamie

 

[mgs4]

Thanks all for the feedback.

For those who have experience on break fees, I understand the most important input is the bank's cost of funds, which lately has been trending down. The other relevant input is term left on the fixed loan. How close do you need to move to the end of the fixed loan for the break fee to really start falling? Does anyone have any further views on outlook for cost of funds and its influence on break fees?

 

[Peter_Tersteeg]

The closer you get to the end of the fixed term the lower the exit costs are going to be, beyond that it's anybodies guess. I do suspect it's a fairly linear relationship however.

Whilst there's some obvious parameters to calculating fixed rated, the value of those parameters aren't disclosed by the bank and they do change. The only way you'll get an accurate figure is to ask the bank directly.

I have noticed that assuming the rates don't change and the variable is lower than the fixed rates, the exit cost is often about double the actual saving you'd make over the remaining time.