Last week I got half of my home loan serviced. Here are the tricks you need to know
Correction of fact 1: You can only attach a clearing account to a variable loan.
Well, you might be able to snag one at a fixed portion, but the “win” rate will be pitiful. You can only save half the interest on the money you hold.
Full and quality compensation will give you a dollar-for-dollar reduction in your loan balance and save you 100% interest on that amount. Offsets are important and powerful debt reduction tools if structured properly.
All of the borrowers savings should be held there, including your salary. And if you’re disciplined, consider putting your spending on a credit card with a long, interest-free period so you can sit your bills on it and save extra interest all month — for free.
And that’s a big part of why I always advocate a variable portion of a loan.
Fix Fact 2: You will lose any overpayments you made directly on a loan.
Few people realize that a major change like fixing your loan will likely cause your balance to be recalculated and suck up any amount by which you are ahead of that balance.
If you’ve just parked money in your loan for a later date – or if it’s savings as above – it will “go away” with the hold. Or at least be locked at the top forever more.
If you need to maintain access to your money — and you always need to keep emergency funds set aside — you need to withdraw it first. Note that while you can make additional (limited) repayments once a hotfix begins, most lenders won’t allow you to redraw them either.
Indeed, it would be better if you never counted on a re-draw – lenders can and have refused withdrawals even on variable loans. Making additional repayments to a separate clearing account is a much safer and more flexible strategy.
Correction of fact 3: The “ERA” will cost you dearly if you sell your home or terminate your loan early.
Prepayment Adjustment (ERA) will apply if you attempt to break the contract. It’s because you’ve made a commitment to stay – and to pay.
The calculation compensates the bank for the revenue it would lose and could run into the tens of thousands of dollars if the variable rates went way below what you set. You must settle your bad bet.
For all the reasons above, it’s a great decision to throw a fix into the mix.
But with another rate hike – and possibly even a double – now widely expected on Tuesday, could you be saved?
- The advice given in this article is of a general nature and is not intended to influence readers’ decisions regarding investments or financial products. Before making financial decisions, they should always seek their own professional advice that takes into account their personal circumstances.