Options at the time of a loan rollover
Part of any good mortgage structure should have a mixture of floating and fixed parts to a loan.
Summary of Floating verse Fixed loans:
Floating loans – Floating loans allow you to pay extra off your mortgage with no penalty for doing so. The downside to having a floating loan is the interest rate is generally higher (sometimes a lot higher) than a fixed loan.
Fixed Loans – Fixed loans provide certainty against increases in interest rates and provide security around knowing exactly how much your repayments are on a weekly, fortnightly or monthly basis. The downside to fixed rates are there can be break fees if a loan is broken through selling a home, refinancing to another lender, or paying off a lump sum in the middle of the fixed term.
Tips and Tricks at the time your loan rolls over (renews).
Because fixed loans are fixed for certain periods (usually 6 months through to 5 years) they come up for renewal at the end of that fixed term and a new interest rate needs to be negotiated for the next agreed fixed term.
It is at this point that all sorts of magic can happen.
Options when rates have gone down since the original loan was fixed:
- If lower rates are available, it allows for 2 options
- If higher rates are the only choice
Extra savings or lump payments.
If you come into money or have saved a lump sum that you won’t miss, then the timing of a loan rollover can be to your advantage. As a mortgage adviser I can let the bank know that on the day your loan is rolling over there is a wish to make a lump sum payment against the loan.
Unlike paying lump sums off in the middle of a fixed term (which is likely to result in a break fee), placing a lump sum on the day your existing fixed rate expires means there are no cost to you for doing so. This is a great way of paying your mortgage off quicker.
Reloading a Line of Credit facility or floating loan at the time of a loan rollover.
If during the fixed term you have paid most or all of a floating loan or Line of Credit facility (some call it a Revolving Credit facility) off, then this is the perfect time to reload these account.
For example – at the beginning of your fixed term (let’s say for 1 year) we also set up a floating or Line of Credit facility for $10,000.00. During the year you have manged to pay the $10,000.00 off in full and the fixed loan comes up for renewal.
We can then take $10,000.00 off the loan that is about to renew and reload the floating or Line of Credit facility. This way it gives you another year to aggressively pay of the $10,000.00 again.
E.g.
We fix in $100,000.00 for 1 year and set up a floating or Line of Credit facility of $10,000.00
At the end of the year you have paid the $10,000.00 to zero.
On the day the fixed loan of $100,000.00 comes up for renewal we take $10,000.00 from the loan to reload the floating or Line of Credit facility.
So now we have a new fixed loan of $90,000.00 and a refreshed floating loan of $10,000.00 that can be aggressively paid off again.
Similar to making lump payments, this helps pay your mortgage off very quickly.
Summary:
Loan roll overs offer ways or re-touching your mortgage without penalty. Done correctly it can save thousands of dollars in interest repayments. Changes made can be subtle and still save you money and time spent paying off your mortgage. You can also be super aggressive and reap the rewards.
In most cases we find an area in between these two options so you can have a life and a mortgage at the same time.
Please feel free to contact one of the team at Advanced Mortgage Solutions to see what best suits you.