Nila Sweeney

Offset vs redraw.
There are several loan products available that seem ideal for me but have no offset account. Although an offset account is not essential for my home loan, it would be desirable.

If an account allows unlimited additional repayments and has a redraw facility that has no minimum amount, no limit to how often you can redraw, internet access and no fees, isn’t it virtually the same as an offset account?

Using these sorts of features,can I have my entire salary paid as additional payments, and then live day-to-day on my credit card (setting myself a monthly limit)? Then I could simply transfer an amount via the internet every 50 days to pay off the credit card before it accrues any interest. This would leave more of my salary in the redraw account each month and also a constantly increasing amount (budgeted within credit card spending limit).

Is this more or less correct? And what (if any) are the differences between offset and redraw when there seem to be no limitations on either?
Thanks, Charlie

Jennifer Nielsen, CEO, loan market group, has come up with an answer for you.

"Placing your whole pay in the home loan, living off your credit card and then redrawing once a month to repay the balance in full is a reasonable strategy. There are a number of lenders who provide redraw facilities at no cost, with no minimum amount and with the ability to do so on the internet.

Personally, I think there are better options. There are a number of factors you should consider with this type of arrangement:

1. It is likely that you will pay a slightly higher interest rate to cover this type of redraw feature. The cheapest interest rates with no ongoing fees are usually the ‘basic’ products offered by lenders. In exchange for the lower rate and no fees, they will charge a redraw fee, often around the $50 mark, for each redraw.

2. Almost everything is payable electronically but the key word is 'almost'. We still need cash for some things – a chocolate bar at the local 7-Eleven or a drink at the local pub. Getting a cash advance on your credit card can be a very expensive exercise as you pay interest from the day you draw, so don’t use credit card 'cash' for this kind of activity.

3. If you miss the payment date on your credit card due an unforeseen event or something goes wrong with your electronic banking, the interest you pay on your credit card (even for one month) will negate most of the financial benefit – and potentially the entire benefit you have accrued for the whole year.

A 100% offset account in conjunction with your home loan would probably be a safer and more convenient option. One lender offers a competitive basic home loan with a 100% offset facility. It has no ongoing fees on either the home loan or offset account, and includes the free use of any bank ATM in Australia. Why trouble yourself with the risks and inconvenience of redraw?"

Breaking a fixed-rate loan.
Hi, we have a mortgage of $341,000 with Westpac. We have taken a split option of $41,000 variable and $300,000 fixed. What would be the costs to change the fixed portion to a lower rate now available? We have had this loan for one year
Thank you, Mark

It is certainly topical in the current climate where fixed rates have been reduced heavily by most lending institutions. To answer your question more thoroughly, Miriam Agnos, a personal mortgage advisor from Smartline, has provided this response:

"Break costs on fixed-rate loans need to be calculated daily as they vary day by day. The actual penalty you are charged is dependent on:
• the swap rate on the day you break the rate versus the swap rate on the day you fixed your rate
• the total fixed term and
• how long you have left to go on your fixed term

This is why, when you sign a loan offer on a fixed rate, it says 'Unable to ascertain break costs'. Essentially,the bank uses the factors listed above to calculate the monetary loss it will suffer when you break the contract early.

Fixed rates are a good option when you are looking for security of repayments in an environment where rates are rising. They also mean you're unlikely to break the fixed rate during the term of the loan.

In the current market, we have a lot of people enquiring about breaking their fixed-rate loans. However, due to current market conditions, break costs are coming in at incredibly high and prohibitive figures. For most average loans, the break costs range between $10,000–15,000, but it does vary depending on the situation.

The best advice I can give you is to call your bank or broker and ask them to calculate an 'indicative break cost' for you, which is current on the day. Unfortunately, I don’t imagine the response will make you want to jump in and break your fixed rate.
Good luck."

Half-monthly repayments paid fortnightly.
I have read that setting up a loan with half-monthly repayments then paying fortnightly can save a lot on interest repayments. Can you please explain how this works? What should I instruct the bank to do when setting up the loan?
Thanks, TJ

Martin Castilla, personal mortgage adviser with Smartline, has given this response:

"That’s a very good question, TJ, the answer to which can make a huge difference to your loan term and therefore interest paid.

Lenders work out principal and interest (P&I) repayments in different ways, which can be confusing.

Some calculate weekly repayments as:
(A) annual repayments divided by 52, or
(B) annual repayments divided by 12 divided by 4.

So, in dollar terms, on a $350,000 loan over 30 years at 7.5% interest the repayments are $565 per week for (A) and $611 per week for (B), even though both repayments occur on a weekly basis.

You can see that paying by method (B) you’d pay the loan off faster because you are paying more into the loan each week.

The same thing happens with fortnightly P&I repayments.

A lender may calculate your fortnightly amount as:
(C) annual repayments divided by 26, or
(D) annual repayments divided by 12 divided by 2.

So fortnightly repayments would be $1,129 for (C), and $1,223 for (D).

Again, because one repayment is larger than the other, even though both repayments occur every second week, this will help you pay your home loan faster, because you’re paying off more of the principal amount with each repayment (but the amount of interest in each repayment is the same).

It's important to ask your lender which method they use to calculate repayments so you don’t underestimate your commitment.

If possible, you should set your automatic repayments to the larger amount, regardless. Your lender or personal mortgage adviser will be able to show you the loan term and dollar savings benefit on a chart – and it’s often a dramatic saving!"

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