And despite all the smart money theories in the world, the reality is that your financial strategy should make you feel relaxed and comfortable.
I put half the mortgage interest on our first home — an apartment — in what turned out to be perfect timing.
It was 2005 and we tossed every spare cent — and some that weren’t left — into the floating-rate portion of the loan. With focus and thrift, we had paid it off by the time the three-year fix ended. That our solution was static as variable rates rose kept money there to pay extra.
Offset ‘secret weapon’
But when I say “we threw every spare cent into the variable portion,” I actually mean something else: We threw money into a contra mortgage account that ran next to the variable-rate portion of the loan.
A contra account is a debt-free “secret weapon” because you can use every dollar that goes through your hands twice: for its intended purpose – next vacation, school fees, emergency fund, whatever – and to lower your loan interest and, ultimately, the amount time you spend in debt.
At the end you also have the money. It just saves you a fortune in interest along the way.
If you want to do a life flip and, say, decide to switch states like we did, filling a contra account with cash instead of paying off your mortgage yourself means you get access to the money. to buy your next home.
An additional advantage: you have technically never paid extra on your mortgage, so you have the opportunity to turn house No. 1 into a tax-efficient investment property.
“Option” is the key word when it comes to contra accounts. Using them smartly not only helps you get mortgage-free faster, it also keeps a door open for future property purchases.
It also quarantines your lender’s money, as opposed to relying on a re-withdrawal facility, so you can keep access to it if you run into financial trouble.
Lenders have the ability to “recalculate” your loan balance and absorb any additional payments you may have made in the loan should you run into financial difficulties. Read the fine print in your mortgage contract.
But here’s the thing: Fixed-rate mortgage products usually don’t have a full contra account. That’s why I would never pay off my entire loan. My emergency money stack needs at the very least an interest-optimizing home.
Seismic Velocity Shift
What do you look at when you solve it now? Pay a little extra in advance. The recent fixed rate hikes have been, well, extreme.
Mozo’s head of research Peter Marshall told me: “I don’t think I’ve seen such big price movements in my… [almost] 40 years in finance”.
The seismic shift in interest rate expectations is evidenced by the Commonwealth Bank’s (CBA) huge 1.4 percentage point jump in some of its fixed rate mortgages last week.
Note, however, that many lenders are becoming more competitive on their variable interest rates. CBA last week cut its no-nonsense floating-rate product by 15 basis points…if you have a 30 percent down payment, you pay only 2.79 percent.
No compensation, so “no thank you”.
Across the market (including fully featured products), the average standard variable mortgage rate is now 4.37 percent, according to Mozo.
The average of the four major banks if you only look at discounted packaged products is 4.2 percent.
The cheapest variable rate in the market from a contra account lender is Well Home Loans, at 2.6 percent. Of course, there’s a problem: Those variable interest rates will go up. Possibly by many.
When you consider that the fixed interest rate was about 2 percent early this year, you can see how dramatic the change has been.
Does this change my decision to set the interest on part of my mortgage and keep the rest flowing so that I can use a contra account to pay off my new debt faster?
No chance. Not much is certain in my world right now. For that I need my monthly repayment.
- The advice in this article is of a general nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.
#Glad #Longer #Mortgage #Free