Hello, Being new to this whole new mortgage process. Would like to ask some questions as i cannot figure out how it works. I understand home loan interest are calculated on a daily basis. So why wouldnt the repayment reduce weekly as you pay them? Also, say your weekly payment is $500 a week for 30 years. And one of the week you decided to pay $1000 just for that week. Wouldnt the minimum weekly repayment be lesser thereafter? i am so confuse!
Not advice, talk to your mortgage broker. Or read the terms of your mortgage. Your repayments (assuming PandI) are a combination of principal and interest. If interest rates don't change over 25 years, your repayments are designed to stay the same over 25 years. The calc usually comes out at you pay 2% principal a year over 25 years. Clearly that's not adding up to 100%, except that it does, because at first you are paying very little principal, and at the end, you are paying almost all principal. If you repay more principal than the contract requires, sometimes you may be able to ask the bank to recalculate a reduced repayment, but you would lose the redraw. An offset reduces the interest portion of the repayment.
so is fix rate a wiser option comparing to variable? say if you have an interest of 2.7% which i believe is towards to low side, isnt it better to lock it in? I see many of my friends taking on variable interest and have no idea why. Is there a limit on how much the interest can change with variable?
Generally the additional $500 paid would not make much obvious difference to the amount of interest charged in subsequent weeks. The benefit to you is that the loan balance decreases, so each subsequent payment incurs less interest and therefore more $$$ is paid off the outstanding balance. Over time this reduces the amount of time it tales to pay off the loan. Your bank will not change the minimum repayment unless you specifically ask them to do so, and for an amount of $500 overall, the impact may only be a few cents.
There is no limit to the interest charges with variable loans. There are both benefits and drawbacks to both kinds of loans, and we can never predict the future accurately.
Your set minimum repayments will always be the same, if you pay extra it will mean you're being charged less interest and paying off the loan faster.
The answer is always "it depends". If a bank will provide a fixed rate, they are already factoring in a rate rise (or reduction) during the fixed period. It provides the borrower with the certainty of how much they will be paying each period. A variable rate is just that. It may be lower/higher than a fixed rate at the same date but can move. If the rates rise when you're subject to a fixed rate, you feel the pinch when you refinance but have benefitted by paying the lower rate, converse is also applicable if rates have dropped.
Interest is calculated on a daily basis. A principal & interest repayment is calculated as a monthly figure based on the loan amount, interest rate and loan term (time to pay off the loan in full). The payment comprises of principal (pays off the loan) and interest. The interest figure is a function of how much you owe. As the principal pays the loan off, the interest reduces. Thus the principal component of the repayment increases as you pay off more and more of the loan. This in turn pays off the loan faster and faster over time. An offset account or extra repayments reduces the amount you owe in these calculations, so this reduces the interest, further increasing how fast the loan is paid off. Fixed rates or variable rates are a type of loan. Both have advantages and disadvantages. Many people opt for a split loan to get the benefit of both. The best solution depends on the individual circumstances. People grossly underestimate the complexity of lending, especially in the investment space. There is a lot more to it than getting the cheapest interest rate. It costs you nothing to get proper advice from a mortgage broker.
Everyone's situation is different, they may want to save money in their offset account for future use rather than paying it onto the loan while still getting the benefit of reduced interest. They may want to pay large sums off the principal without penalty (fixed rates have limits on how much extra you can pay onto the loan during the fixed period, usually around $10K over the minimum repayments) So there are a few things to consider, you can split loans and have part fixed and part variable with offset and some lenders allow an offset account on their fixed rate products.
Mortgages aren't just about repayments, or interest rates. Tax consequences of redraws. How to refinance and buy further properties. How that's different to upgrading, whether you are selling the existing ppor to upgrade, or upgrading and keeping the existing ppor as IP. The important thing about extra repayments is how it impacts future loans, redraws, etc. The impact on the amount of repayments is WAY down the list. Op is getting confused over something that is really not important.
