What is the best type of mortgage? Why should we care? How do we know what to with our debt? Who will tell us?

 

How on earth do we know what to do with our mortgage?  Fixed? Floating? Variable? Offsetting?  What is the difference?  Is there one that is right for me?  

Hopefully today we can shed some light on this, I had a house for quite sometime before I realised what was going on with these.

Everyone is different, how they keep their money is different.  I have found heaps of crazy beliefs out there: from keeping it under the mattress to having some money in 10 different bank accounts at 10 different banks, just in case things fall apart.

If you have a mortgage, you are best to have all your bank accounts at one bank.  All will become clearer as we go through this and look, yet again, at the example we have been using with the mortgage in the last few blogs.  Are you ready?  Let's go.

Let's imagine for a moment I have a few different bank accounts, I have a credit card, I have a bill pay account, I have a mortgage pay account, my kids have bank accounts, I have Kiwisaver with a provider, I have another two bank accounts at different banks for whatever reason, and I have a mortgage with the bank that would give me one!

First thing to do is, get everything in the same bank, yes the returns might be slightly different but if it is all together you get a better understanding of where you are, and that is going to help you here.  Go to the bank you have the mortgage at, the hardest thing to transfer.  Make sure all your accounts, kiwisaver and credit card are with the one bank and all loaded on your phone banking ap so you can see what is going on every day.  That way there is no delay if you are transferring over from one to the other as well.  Remember the goal is to keep as much money in the bank every day as you possibly can. 

Then, with the exception of kiwisaver and your credit card balance, have a look at how much the DAILY total of the others is, what the fluctuation is.  I understand that people get paid and the pay all goes out, I am one of those people, I understand.  But if you look at the best day of the month when you add up all the balances and you might be surprised at how much is in the total of those accounts.  This is even more if you have been using your credit card according to the last credit card blog.  You might have, even as much as $10,000 coming and going over a month.  

Let's use that as a figure, don't know if I have told you I like round figures.  Let's imagine the total of savings and bill pay and normal accounts, because you use your credit card have around $10,000 in total.

If you think about that, there is $10,000 that is not working for you, yes it is sitting there, earmarked for other things but it really isn't working for you at all, and it could be.

Now let's shelve that for a moment.  If we talk briefly about mortgage rates, as of today the variable rate at my bank is 7.74% and the fixed rate for one year is 6.74%  There is not that much difference between the two sometimes it is much greater.

If you float (make revolving or offsetting on the variable rate), part of your mortgage that is three times the amount of the total of all of your accounts on one day.  You will have (using our $10,000 example), a $30,000 revolving or offsetting mortgage with $10,000 in it!  

So a revolving or offsetting mortgage works like an overdraft so if you have a $30,000 facility you don't pay interest on the full $30,000 like you would a fixed mortgage, you only pay on the difference between that and the $10,000, so $20,000 has interest charged on it.  This is calculated daily, a variable mortgage is interest only, but you still try to aim for zero.

This means there is a variable rate charged at 7.74% on that $30,000 but the effective rate will only be 2/3 of 7.74 which is 5.15% which is substantially less than any fixed rate on offer.

Because these variable mortgages are treated like an overdraft you do naturally try to aim for a zero balance so it encourages you to save more, almost by accident.  This also encourages you to keep some money in your bank account and use your credit card and only pay off as much as you need (not the minimum but the balance due) on the due date.  Maximising what is offsetting your mortgage.

Lets Look at the example we have been using so far:

• $400,000    $1,885/mth    25 yrs    2.95%    Interest paid over term of loan $166,147

At thig point you are feeling all rosy and things are OK.  However, if you choose to turn a blind eye and do nothing, this is what can happen!  Look at the difference in repayments and the difference in interest paid over term!

• $400,000     $3,017/mth    25 yrs    7.74%  Interest paid over term of loan $506,648

So when thinking of the best thing to do, lets fix at the cheapest rate at the moment which, at this particular bank is 18mths at 6.49%, that will mean things will looks like this:

• $400,000    $2,696/mth    25 yrs    6.49%    Interest paid over term of loan $410,550

There are a few things you can do to further help you in this situation.  In this scenario you can change your repayments to fortnightly. and keep the term at 25 years.  If you do that, this happens:

• $400,000    $1,240/ftnt    25 yrs    6.49%    Interest paid over term of loan $410,255

Find out another bank if offering a better rate of 6.29% ask the bank to match it and this happens:

• $400,000    $1,217/ftnt    25 yrs    6.29%    Interest paid over term of loan $395,381

If we look at our example of an offset mortgage and how this would effect us, we would split our mortgage as follows:

• $370,000 $1,217/ftnt  21 yrs    6.29% interest paid over term of loan $297,849
• Payments saved over 4 years if $126,568
• $30,000 interest only, aiming for zero,  30 yrs 5.15% interest paid over term $28,942

Please please get a grip on how this can work for you.  Not sure if you realised what just happened here but, basically by putting all your savings and day to day money into one account (your $30,000 overdraft variable mortgage) and still paying the same fortnightly payment, you just saved $126,568!!!!

Feel free to double check my figures, this has been tried and true a number of times, it helps you get ahead so much quicker!  

Take the time to digest this, feel free to ask questions, as this is very confusing for many people.  You simply must take all the steps I have pointed out in this blog.  Please don't go to the bank and ask about this until you have asked all the necessary questions of me.  This is so important to understand. 

Learn how to make your money work for you.  Over the next few days I am going to explain the difference between variable, revolving and offsetting.  You need to understand these as well.  Please go over and over this blog, and let's see how we go.  I am happy to clarify.

Once again, please feel free to share, but make sure they can access all of the blogs as this is "big picture" stuff and if you understand it you can take control.

Please follow, share, comment and like if you want to, I am happy to help out.   Have a fabulous day, you have got this!