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 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 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 downsides 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
- Accept the lower rate but leave your loan repayments unchanged – This will pay your loan off a lot quicker as more of your payment goes towards the principal of the loan. You will be amazed how much quicker this will pay off your mortgage.
- Accept the lower rate but reduce your repayments to the minimum possible – This will leave the time to pay off your loan unchanged, however it will improve your personal cash flow because you are making smaller repayments than before. This is a sensible option to take if you are finding it hard to make ends meet.
If higher rates are the only choice
- Contact your mortgage adviser as soon as you can to negotiate on new interest rates. Depending on your lender a mortgage adviser can secure and lock in new rates between 4 to 8 weeks in advance of your loan rolling over. By getting in as soon as possible to re-fix your loan you may avoid rates going up again while you wait.
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 is 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 accounts.
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 managed 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 off the $10,000.00 again.
We can then 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. 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.
Loan roll overs offer ways of 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.
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Published by Scott Miller
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