I have a question about something in Jan's book "More Wealth" on p171 about paying yearly interest in advance. Jan gives an example of 8% in arrears (monthly) being equivalent to 7.36% in advance when paid yearly in advance. She also states that the in advance rate should be better than that to make it attractive.
I'm afraid that I have to admit that even after thinking about this at length, I don't understand why it needs to be 7.36% or lower.
And I am in a rush to understand it because I just signed for a house in Wellington Point (QLD) and I need to choose loan type and period.
At the moment, I am favouring an IO (of course) with the interest rate fixed at 6.79% for 5 years. I have the option of pre-paying the year's interest in advance and getting the rate down to 6.59%. This is a difference of 0.2% between the in arrears and in advance rates.
However, Jan's comment about the difference needing to be more worries me that I have not understood something fundamental and I'm about to make a mistake.
I do wish to go with the year in advance payment because it will help reduce the effect of a large CG event this tax year.
Comments and advice would be most gratefully received.
cheers
raoul
PS: I'm also worried about the Real Estate Agent's commissions for collecting the rent. The RE agents managing my two rental properties in Melbourne only charge 7%+$24 for statements, but the two quotes I've had from local agents in Wellington Point want 8% and 8.5%.
I am mindful that Jan said somewhere to nuture relationships with PMs and tradespeople, but how do you that while stopping people taking advantage of you...
What do other people pay in commission to their PMs?
I'm afraid that I have to admit that even after thinking about this at length, I don't understand why it needs to be 7.36% or lower.
And I am in a rush to understand it because I just signed for a house in Wellington Point (QLD) and I need to choose loan type and period.
At the moment, I am favouring an IO (of course) with the interest rate fixed at 6.79% for 5 years. I have the option of pre-paying the year's interest in advance and getting the rate down to 6.59%. This is a difference of 0.2% between the in arrears and in advance rates.
However, Jan's comment about the difference needing to be more worries me that I have not understood something fundamental and I'm about to make a mistake.
I do wish to go with the year in advance payment because it will help reduce the effect of a large CG event this tax year.
Comments and advice would be most gratefully received.
cheers
raoul
PS: I'm also worried about the Real Estate Agent's commissions for collecting the rent. The RE agents managing my two rental properties in Melbourne only charge 7%+$24 for statements, but the two quotes I've had from local agents in Wellington Point want 8% and 8.5%.
I am mindful that Jan said somewhere to nuture relationships with PMs and tradespeople, but how do you that while stopping people taking advantage of you...
What do other people pay in commission to their PMs?