Clarification on Interest/Interest+Principle Repayments

[Deactivated] on 13/10/2014 - 12:37

Recently signed my life away with a mortgage, just started with the repayment and to give myself some breathing room and gauging how far the money stretches the loan is currently set up for interest only payment.

For ease of calculation say the interest only = $2,000/month and interest + principle = $3,000. Is there any difference between:

a) Staying on interest only set-up and allow $2,000 to be auto withdrew monthly and pay $1,000 manually.

b) Switch to interest + principle and allow $3,000 to be auto withdrew monthly.

Thus far I've been doing (a), various factors in the upcoming 12-24 months may mean I can pay interest only for a bit if I run into some setbacks. Assuming I wish to pay $3,000/month is there any difference with doing (a) or (b)?

Cheers

Financial

Comments

  • PissLUR on 13/10/2014 - 13:13

    do you have an off-set savings/transactions account?

    • [Deactivated] on 13/10/2014 - 13:31

      Yes and am using.

      • ESEMCE on 13/10/2014 - 13:45
        +2

        As long as you're disciplined, stay with Interest only and keep building up that Offset account.
        Means you have access to that money any time you need it, but you're paying off your loan just as fast as Interest+Principle.

        Most people aren't that disciplined though. They'll redraw to go on holiday, buy a new car etc, or wont pay in the full $1000 each month.
        As a result, Interest+Principle is a forced method of "saving". The problem being you'll have to renegotiate the loan to get access to the money you've paid down on the Principle.

        • [Deactivated] on 13/10/2014 - 14:27

          Cool, I couldn't think why it'd be different but wanted to make sure there's no surplus expected. Thanks heaps

      • PissLUR on 13/10/2014 - 13:47
        +1

        then it would be the same with the 2 options. another one feature that might be handy is redraw.

        • ESEMCE on 13/10/2014 - 13:56

          Isn't redraw standard for an Offset?

        • PissLUR on 13/10/2014 - 13:58

          @scubacoles:

          redraw for the loan account.

        • [Deactivated] on 13/10/2014 - 14:27

          Thanks for confirming matey.

  • malkakas on 13/10/2014 - 14:52
    +1

    Reading your post it seems that you are on a tight budget. If you can't afford to pay the principle + mortgage at current ~5% rates, I don't know how you can survive if the rates go up (let's say 2%)

    If this place is your residence it is better to pay off some principle while the interest is low. then you'll have some breathing space when the interest goes up.

    as an example for a mortgage of $450,000 @ 5.2% interest for 30yrs;
    the monthly interest only payment is $1950. the principle + interest is $2471.

    After 5 years let's assume interest go up by 2% to 7.20%
    if you have't paid any of the principle your new repayment would be $2700 per month.

    • [Deactivated] on 14/10/2014 - 00:37

      Am not currently on a tight budget, doing ok with me covering the P+I+25%/month and the missus covering everything else. The loan is on 10yr interest only and I was going to keep it this way for a year or two to allow me to roll back to lower payment if the need ever arise. The ~$1,000,000 total is daunting and I'm trying to put bit of a ding into it early on, there are however a few pending needs such as my half buggered car so I may go interest only for 2-3 months to get a replacement, just wanting to know the option is there.

      • Sweetnsour on 14/10/2014 - 07:42

        Which lender did you go with? My interest only loan was 5 years period only. After which we would need to refinance.

        • [Deactivated] on 14/10/2014 - 07:43

          It's Firstmac.

  • ilostnemo on 13/10/2014 - 15:12

    Make sure if it's a fixed interest rate, there aren't any penalties. CBA used to only let you pay $10k extra a year on a fixed rate loan.

    Also offset on fixed interest loans is sometimes not 100%

  • Mulga Bill on 13/10/2014 - 15:29

    The two scenarios will do a similar thing but there are a few things to keep in mind. After (say) a 2 years period of "interest only plus $1,000" you will (depending on the bank/loan?) have $24,000 available to redraw where as 2 years P&I you wont. The other thing it will do (i believe) is mean when you finish your interest only period your future P&I repayments will be recalculated on the shorter loan term remaining meaning they will be higher (say $3,100). I dont know if this made sense or not but either way your bank should be able to confirm it for you.

  • debb on 14/10/2014 - 10:25
    +2

    The two options are the same if the loan and offset account interests are the same, otherwise, there would be a variation. In my case, my offset account interest is 0.5% less than my loan interest. I prefer parking money in the offset account for ease of access.

    It's interest and princiPAL, not princiPLE :)

Login or Join to leave a comment
Login Join