YNAB You Need A Budget

[jjsouth]

So here's the situation: I have been paying my mortgage a month ahead (so on March 1st, I paid April's mortgage payment). My checking account earns 4% at my bank, so would I be better off adding that extra mortgage payment to my EF balance and paying my house payment on time instead of early? I don't think I save any interest on my mortgage by paying a month early. I was king of thinking of it as an extra month's buffer on my mortgage, but now I'm thinking I'd be better off putting it in with my EF funds and getting closer to that goal? Thoughts?

Thanks!

Joyce

[Dzaka]

Well in my opinion I think it would be better to build your e-fund up. So when Murphy comes calling your better able to handle it. If you want to save on the interest on your mortgage try to make an extra payment a year. Like if you payment is 1,000 pay $1083.34 instead. Then at the end of the year you would have made 13 payments instead of 12. Just make sure the extra gets applied to your principal and does not end up in an escrow account. I learned that one the hard way

[blarg]

Joyce, I'd check with whoever gave you the mortgage to see if you can get early payments to cost you less interest.

Here in Australia any extra payment you make decreases the amount of interest they charge you, and then they even offer debit cards so you can "redraw" your money back out as long as it was over and above your normal payments anyway. There are also mortgages that have a linked account where the balance of the account is treated like you've paid it into the mortgage so you can avoid paying interest on your whole YNAB buffer while still having access to it. When we get a mortgage we'll either have both our pays deposited to the mortgage and use redraw to pay bills to avoid the interest, or get a linked account and keep everything in there.

Not sure how it works back in the US.

[jjsouth]

Blarg: Wow. I know it doesn't work like that here. Sounds interesting. So any amount of time that you have extra $$ in the account reduces the interest you owe? Is it at the rate of the mortgage? Very different from what I'm used to here.

I need to check my mortgage statements to see if they are different than the amortization schedule, but I don't think paying a payment a month ahead of time is saving me any interest. I do pay a bit extra towards my principle each month and that does save interest. I'm only doing a small amount right now ($50/month) since I'm focusing on building my EF to six months. I just got an escrow refund and I'll throw that towards the principle balance and I use a Citibank CC that puts 1% of my transactions towards my mortgage once per year. So I'm paying it down ahead of schedule, but not much. Once the EF is full, then I'll pay a good bit more per month (well... I say that, but I've got four boys who, within 6 years, will all be on my insurance... ouch!). Anyway. If my statements don't show any savings, then I'll get away from early payments and earn my 4% on it instead.

Thanks blarg and dzaka for talking it through with me. It's always good to get other perspectives.

Joyce

[blarg]

So any amount of time that you have extra $$ in the account reduces the interest you owe? Is it at the rate of the mortgage? Very different from what I'm used to here.

Yup. Here's the offset account mortgage ING offers in Australia: https://www.ingdirect.com.au/home_loans ... antage.htm

They treat any money in your everyday account as a reduction in principal when they're calculating interest. Has higher fees, but has the convenience of being a regular account that direct debits can hit, etc.

And their standard mortgage:
https://www.ingdirect.com.au/home_loans ... lifier.htm

Their Mortgage Simplifier is the one I'm talking about where you would just pay both salaries directly into the mortgage and then redraw. You're saving yourself interest on it by not having to pay your 6% on that amount in your mortgage. If you have 5 grand extra in your mortgage, when they calculate your interest payments, the principal is 5 grand less. Most people I know here that have mortgages don't have savings accounts, or they don't use them, because why would you? Just put it in the mortgage and get more for it by way of having to pay less on your house. The statements here show how much you've been required to pay and how much extra you have that's available for redraw. If you lose your job and you have 8 months buffer in the mortgage, you don't have to make any payments for 8 months either, as you've already paid early. At the end of those 8 months, you'll have $0 available for redraw. There are often penalties for paying out your mortgage too quickly though (in the first 5 years is common).

Anyway, I'll butt out now, as it sounds like this doesn't apply to your situation. I'd probably get massive financial culture shock if I ever move back to the states. I don't know how mortgages work there at all obviously.

[jjsouth]

nyway, I'll butt out now, as it sounds like this doesn't apply to your situation.

No need to butt out. It's my thread and I asked.

I really like the idea of that mortgage. I wonder how it compares side by side to a traditional American mortgage. (30 yrs at some interest rate, payments due monthly, typically no pre-payment penalties, and no fees other than the upfront closing costs) Like: are the interest rates at any given point higher for one or the other? Do you have ongoing fees with the account?

For us the only way to pay the principle down is to give them your money and you never will see it again. So it's a risk. Like my sister-in-law said to her husband when he suggested putting a large part of their savings into their mortgage balance, "The third bedroom can't feed us if we're laid off." So it's a balancing act. I guess you just have to make sure you have a good emergency fund and then start paying down the house.

I really like the thought that my every day money sitting in my account could reduce the amount of interest I pay on my mortgage. Very attractive. Especially early on in the mortgage when reducing the balance makes a big difference.

Hmmm... looks like I have yet one more thing to keep me busy online.

Joyce

[reznix]

Another thing to keep in mind when paying down the mortgage are any t_ax benefits. If your mortgage is big enough that interest beats the standard t_ax deduction, then the effective rate on the loan is actually lower than the stated APR. I have a high yield checking account that is close enough to the mortgage that I choose to invest the money instead of prepaying.

And as someone else mentioned, if you lose your job, you don't want to have to sell your house to get to the funds you could have keep liquid.

Prepaying a mortgage usually ends up being a personal decision that combines emotional as well as financial decisions.
Some people want no debt, some want to maximize their returns, and some want a little bit of both.

[blarg]

:) No need to butt out. It's my thread and I asked.

Cool, I'll keep yapping then.

I wonder how it compares side by side to a traditional American mortgage. (30 yrs at some interest rate, payments due monthly, typically no pre-payment penalties, and no fees other than the upfront closing costs) Like: are the interest rates at any given point higher for one or the other? Do you have ongoing fees with the account?

For one, in the US I think you usually get a fixed rate for the life of the loan. That doesn't happen here. Ever. If you want a fixed rate, you pay more for it, and the longer you want it for, the more you pay. Getting the first 5 years of the mortgage at a fixed rate inflates the rate by about 4%. Which is a lot of money. So you can have 6% variable or 10% fixed for five years, at which time it becomes variable anyway. Do you really think the interest rate is going to go higher than 10% in 5 years? How long is it going to stay there?

This leads most Aussies to simply choose a variable rate mortgage and then make payments as if they're paying the fixed interest rate. This gives you extra if the rate doesn't go up, and if it does go up, you've paid down your principal earlier than you would have with the fixed rate. The other side to this though is that it is a real possibility that the interest rate will be huge at some point in your mortgage. In the 80s there was a period here where the interest rates were %20. %20!?!?!. Yup. So they use interest rates here as a way to control the whole economy. Going to quickly? Raise it. Too slowly? Lower it. This has the immediate effect of giving people more or less money in their pockets if they have a mortgage. Nobody offers fixed rates for more than 5 years though, so you just have to plan for it like it's going to happen.

I really like the thought that my every day money sitting in my account could reduce the amount of interest I pay on my mortgage. Very attractive. Especially early on in the mortgage when reducing the balance makes a big difference.

Yeah, I really like it, and if I could get this coupled with a 30 year fixed rate like you guys get, it'd be heaven. I think one of the other reasons we have this facility on our mortgages is because the average house price in Sydney at the moment is $610,000. And that'd be a 2 bedroom small house too. And if you want it close to the city, think more like $800,000. So we're paying down bigger chunks than you'se are.

[jjsouth]

Wow. Okay, I take back wanting that loan. Do they cap increases? Do they set the new interest rates annually?

[blarg]

Wow. Okay, I take back wanting that loan. Do they cap increases? Do they set the new interest rates annually?

They set them whenever they feel like it, and they up it by however much they feel like. Usual increases are .25%, and it's not up above 10% very much. Here's a graph:
http://www.bankers.asn.au/images/UserUp ... graph1.gif

The evil part is that the banks only have to up the rate by (I think) 3% or 4% when they do the affordability calculations to figure out how much to loan you. I make a decent amount of money, and so does my partner, but we're not in 6 figures or anything. When I called the banks to see how much they would loan us, I was told "Without even checking the exact numbers, I can tell you that you'd get at least 1 millon." If we got that loan, making the bare minimum payments at the current interest rate would suck up a good 70% of our income. Not to mention what happens when the interest rate goes up. Ugh.

Oh, and we've never owned a home before, I'm 26, my partner's 32, and they want to loan us a million bucks? Seriously? And suddenly it made sense why house prices are so high here. If you let average Joes borrow a million dollars, then hey presto, house prices go up to 800,000. Check out the international housing affordability report: http://www.demographia.com/dhi-rank200502.htm

Of course if they were to reign that in, people would lose lots of money, default on their mortgages, etc. So they address the "housing affordability crisis" by inflating the house prices even more with a first home buyer's grant ($14,000), first home saver accounts where the government co-contributes 17% up to 5,000 per year and taxes the interest at 15% (we have one for each of us), waivers on stamp duty (a huge tax that you pay when property changes hands here), etc.

I think house prices will always be high here, but they're especially high at the moment, because when the financial crisis hit, they upped the first home buyer's grant to $21,000, lowered interest rates, and encouraged a lot of people to buy houses that I don't think can really afford them. One of my coworkers who bought an apartment a few months ago is already complaining that his payments are too high with the interest rate at 6.25%. It'll be very interesting to watch what happens over the next few years as interest rates return to normal and shake out those that can't actually afford what they bought. I'm hoping we'll be ready to buy just about as that's happening.

[jjsouth]

I hate that I thought this, but at least I know America isn't the only one screwing things up. It's just a mess. We were told we could afford $400K. We borrowed $129K. And that's enough for me. The mortgage broker didn't even ask what our monthly expenses were. He just wanted to know how much debt we had. None. So he was all excited about the fact that we could borrow so much. I knew what my numbers were, what I was comfortable with. But that's also a fixed rate loan at 4.875%. I don't know if I could even convince myself to buy with a variable rate. I'd be scared.

And we took advantage of a down market and got a nice house in a short sale. It's way more house than we ever thought we'd be able to afford. And it's only two years old. It sounds kind of evil, but being ready and waiting when it all comes crumbling down will be to your advantage and I think you're smart to think of it that way.

Joyce

[blarg]

One of the nice things a variable rate gets you is that when times get tough, your payments go down. People started to default here and the RBA (Reserve Bank of Australia) immediately plunged the interest rates. You could look at that two ways:

1) They artificially kept people in houses they can't afford.
2) They saved the market.

I think it's a bit of both. I think they expect some people to default in the next few years, but the unemployment is only 5% here and we essentially didn't have a crisis. So if it happens in a smooth bit by bit way, I don't think we'll see a gigantic crash like what happened in the US, but it will be a dip, and I'm hoping to buy at the bottom.

The other thing that's a bit odd here is they have a thing called "Negative Gearing" which essentially means you have an investment property that you rent out for less than the mortgage payments. The tax write offs are so high, that in many cases it makes more financial sense when things get tough to find your own rental, move out of the house you own, and rent the house you used to live in out for less than your mortgage payments are. You end up with more income (enough more to make it cheaper to make the payments that way). So when things get rough, the rental market gets lower here, and people use negative gearing as a way of continuing their payments.

As far as the US not being the only place to screw it up, definitely! We did better in some respects. The banks here are much more highly regulated, which is one of the biggest reasons we avoided the crisis. We didn't have a single bank close here, as they all have to have more capital on hand to cover things like defaults. We also didn't bail out the banks as none were going to fail. Everyone earning less than a certain amount ($120,000 I think) got $900 cash from the government in the middle of the year, and that was our bail out.

Oh, and as a side note, since the US government counts foreign income as taxable income but gives us deductions and credits for living abroad, I got $300 from the IRS this year without having paid US taxes for 3 years now. Thanks guys! Trying to tax foreign income cuts both ways! I used to be annoyed that I had to fill out a US tax return every year, convert all 52 of my paycheques from AUD to USD at the exchange rate that was applicable the week I was paid, on and on and on, but if you'se are going to pay me for the service then I'm not anywhere near as offended by it.

[WairereRose]

We have similar things in NZ to what they have in Oz, and we also have what they call 'variable capped' rates, so it's sort of like a fixed rate in that it won't go any higher than x%, but it has the advantages of a floating rate in that when they drop, yours can go down too.

The difference in rate between a fixed and floating/variable rate I think is not quite so great here as in Australia either, more like 2-3%, and we can sometimes get a 6 year fixed rate, but 5 is the more common maximum. At the end of that time we can either switch to floating or fix for another period at the going rate then. If you go to floating, you are 'stuck' with floating for another year when it can be reviewed again and you can choose to fix if you want.

One of the banks used to offer a part-fixed/part-floating so that you could fix a large part of the loan but leave some floating (eg, loan $100,000, fix $70,000, float $30,000) - the rationale behind that is that the floating part can generally be paid down without penalty while the fixed part has a penalty payment if it is repaid early. So you fix what you don't think you can repay in the fixed period, and float what you'd like to 'attack' during that time. When it reviews, change the numbers (eg, fix $40,000, float $30,000 again or fix $50,000, float $20,000 while you take that holiday you want with the other $10,000 you would have paid down or whatever) to suit yourself for the next review period which is either a year (floating) or the length of the fixed period you choose, usually between 1 & 5 years.