Not gloating

I don’t mean to gloat or anything, but I’m rather pleased I locked-in my mortgage interest rate last year. It’s locked-in for 5 years (the maximum) which may or may not have been a good idea — only time will tell — but it certainly looks pretty good right now. Mine’s locked-in at 7.85%, whereas my bank’s standard variable rate is now 9.47%.

Meanwhile, interest on savings has also been creeping up, of course. The savings account I have now has 7% interest… which leaves me wondering if it’ll climb so high that it’s above my mortgage rate. If that happens, it’ll be better for me to keep money in the savings account than the mortgage offset account. Weird. (Though now I think about it, I get charged tax on interest earned.)

Some are predicting rates will start to drop again this year. So any advantage I have now may be shortlived.

By Daniel Bowen

Transport blogger / campaigner and spokesperson for the Public Transport Users Association / professional geek.
Bunurong land, Melbourne, Australia.
Opinions on this blog are all mine.

11 replies on “Not gloating”

By the time they drop (if they drop before Xmas) you would probably have saved money in the long run from the interest hikes and fees.
Look into salary sacrifice, if you’re able, it’s a good way to save the pennies when it comes to tax and interest rates.

Mortgage offset accounts are great, aren’t they?

You effectively get a greater return on your savings than if you held them in even a high interest account. It’s also tax free.

You get to keep your mortgage and have instant accesa to the money in the offset account too – unlike some high interest accounts.

Leaves me wondering WHAT the downsides are since it sounds too good to be true. Anyone?

… and if you use your credit card for all transactions and pay it off each month you get even more upside. Clearly the benefit of having my mortgage covers the costs to the bank of me working my finances that way.

Does anyone know, when the Reserve Bank raises rates, and the banks follow suit, is the extra revenue for the banks pure profit (ignoring the fact that their borrowing costs go up as well)?

I also locked (and prepaid) interest in June last year. Locking provides certainty which may help (and in marginal cases even help people keep their home).

But, like the end of honeymoon rates or subprime in the US they can provide a big shock to those who haven’t saved and find their payments rise 30-50% or more.

Over the longer run most of the time variable works out best if you’ve enough buffer to handle the variations – if this wasn’t the case banks wouldn’t be offering fixed at all.

Suzie: An interest rate increase from 6 to 10% is proportionally worse than an increase from 9 to 13%. And if you were paying 13.5% in the ’80s (as many were) you were lucky being on the govt’s cap as new mortgagees had to pay 17% (which were uncapped).

The other thing about 13% interest rates is that inflation was around 8-10%, so the real interest rate was similar to now (4% inflation, 9% interest). And a higher inflation rate meant that the rent (or wages) used to pay the mortgage would (hopefully) rise much faster than the interest payment over the longer run.

>> Leaves me wondering WHAT the downsides are since it sounds too good to be true. Anyone?

None – I’ve been doing it for several years and it’s been awesome. My interest is locked at 6.49%, I’ve paid off around 70% of my loan in 3 years flat, and an offset account that each month tells me I’ve saved quite a few hundred dollars in interest off my loan… hundreds of dollars in savings that in reality is untaxed profit.

And the best news is that in a year’s time when I would have only had 1 year left to go I’ll now be reducing my payments to spread the final year over two years, and not only reduce enough of my repayment to allow my partner to stop working for our baby but the extra interest I’ll pay for that 2 years instead of 1 is around $1200… so why the hell not spread it out!

Fixed interest, paying off every possible cent you can, and shoving as much dosh into an offset account is the best thing you can possibly do… when I first started that plan a few years back I honestly thought I had it wrong somehow and it wouldn’t go to plan, but years later it has gone PRECISELY to plan… couldn’t be happier!

Interest earned on your savings account is taxable income. You’re way better to pay down the mortgage, or, if possible, put the money into a mortgage offset account.

Indeed, except for contingencies, there is no good reason to have a savings account when you have a mortgage. And if you have a credit card sitting in a brick of ice in the freezer, or sufficient cash in an offset account that can be drawn down, you don’t even need savings for contingencies.

We put every possible cent into the mortgage. Meant we were totally paid off before we had kids. I’ve been watching friends with kids and they’re finding the mortgage very hard.

Thanks to the soft commentary at the last RBA meeting, the forecast that the markets are costing in at around 54% probability is something like:

rest of year: flat
Sep 08: 25 basis points reduction
2009: two more 25 basis points reductions.

Still leaves you well ahead tho, and consistency is worth paying for even if the rates keep dropping (which they prob won’t)

(It’s gotta be worth something to be a project manager in a government Treasury organisation :)

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