Flexible or Australian style mortgage

don_tudor

Morning everybody,
Last night a chap visited us to discuss the so called flexible / australian type mortgage. We have a clear credit history and have not defaulted on our previous mortgage which was a 5 year fixed term. He showed us how the mortgage works and it all seems to be in order, as we've got a substantial amount of money owing we don't want to screw things up by going down this road. Does anyone else have any experience of this type of mortgage where you end up paying off the interest quicker and so the mortgage can finish sooner??

maninthestreet

Australian style mortgages

These are calculated on a daily basis, rather than on a traditional month by month system.
Australian mortgages encourage people to pay off their balances earlier, by making additional payments when they can afford to, and are based on a typical 15 year term instead of the standard 25. This can save you thousands of pounds in interest.
However, this type of mortgage does require a significant increase in the amount of monthly payments you make. This becomes a false economy if other expenditure is then placed on credit cards, or through unsecured personal loans.

Jacka87

I seem to be a little confused, can I geta further explanation. From what I understand is that these australian style mortgages are flaxible and you try to pay off as much as you can when you can afford it.

I dont seem to get the difference between this and the usual mortgages where there is a 10% overpayment allowance etc?

For example take a 10yr fix instead mortgage with a 25yr mortgage period with 10% overpayment. Then just pay the fixed rate for 10 yrs, each year that you had extra cash you pay in upto 10 of the mortgage value. By the end of the ten years you would have 15yr term left minus whatever you have overpayed. SO maybe just 5 or 10 yrs left so then get a 5yr fix and see out the mortage. Whats the difference between this and the Australian type?

Jacka87

PS a lot of providers in the UK charge interest daily now as well???

If there is a difference can somebody explain as I am currently in process of trying to remortgage and this may help!

maninthestreet

All other things being equal, a mortage term of 15 years instead of 25 will mean you pay signficantly less interest. That's the main benefit. If you have significant cash savings, you may want to consider an offset mortgage.

Jacka87

Ok so less interest over all but if your at the start of the mortgage when money may be tight that would allow a fairly cheap rate and you could still be all paid up in 15-20 yrs as opposed to 25 so not a huge difference?

The other thing is why not just take out a mortgage say again fixed or whatever for a tem of 15yrs? I always see that when applying mortgage providers give options on the term of the mortgage. Is this a fairly new thing that they are doing based on the idea from the Australian type?

I just dont get how this is really any different from a normal mortgage..

I can understand the differences with fixed, offset, tracker etc but just think that Australian type is non existant if its just related to the term of the mortagage? Am I right?

Joe_Bloggs

I have a Mortgage with the Nationwide. It allows overpayments of £500 a month whilst in a discounted tracker period. These overpayments are unlimited once I drop onto their Basic Mortgage Rate. This is often termed Standard Variable Rate with other lenders. I have been fortunate enough not to have requested features such as payment holidays.

Flexible features are a part of many mortgages. You may have to make overpayments to access them. Shortening the term of the mortgage will happen if you make overpayments and the lender does not reduce the standard monthly repayment. Always consult the specific detailed terms and conditions as they apply to you, rather than rely on the opinion of others based on only their personal circumstances.

You have to acquire the extra money to take full benefit of the overpayment options to shorten the term. I guess many people aspire to being in this situation and that far less end up taking advantage of it. It may make more financial sense to put mortgage overpayments into savings if the net interest rate is greater.

J_B.

don_tudor

Hello again, From my understanding of the chap last night the interest and capital repayment are paid together; the interest pays for the interest and the capital goes into a separate account where it sits from jan - dec increasing in value, at a certain point in dec the capital is paid off the amount owing and the new amount of capital owing is then the figure from which the new interest is calculated. this means that if the payments (both interest and capital lumped together) remains the same the proportion of interest you are paying off is less and consequently the amount of capital you are paying off the loan increases and this continues through the years. the offshoot is that the mortgage will finish earlier. Apparently the banks do not offer this type of mortgage because you pay it off quicker and thus they don't make as much dosh out of you. :beer: Now the broker who i spoke to said that using this system and a large amount of loan companies he could;
reduce the term of our mortgage
reduce the monthly amount that we pay
reduce the total amount that we pay
allow us to take payment holidays if we need them without having to overpay in the first place to pay for the holiday the only issue is that if you don't pay, the term will increase.

My thinking is that this seems a very good way to conduct my affairs but is it too good to be true? He is going to come back to us with a quote in the next week or so, and i'm willing to go for it if it is going to save me money. I think the key to the reduction in term and all the other trimmings that go hand in hand is the way that the next years interest is calculated, ie WHEN it is, i believe that in a normal repayment mortgage the capital repaid the previous year is not that relevant to the following years payments, and here lie-th the rub.... i think. Am i allowed to tell where i got this chap from and which company he works for on this forum?:rotfl:

NikkiP_2

Clydesdale Bank charge daily interest and have done for years.

Joe_Bloggs

It may be that something speculative is being done with the capital part of the mortgage repayment. It has to earn more, than if it was otherwise used to reduce the mortgage capital. This possibly may involve some risk of not paying off your mortgage by the full term.

Making use of the overpayment features on conventional repayment mortgages will knock years off the mortgage. My mortgage will end 10 years early if I keep making the overpayments. I can also request overpayments back if necessary.

Many MSE Mortgage-free wannabee members request their lenders to keep mortgage repayments the same when interest rates are falling or when the capital owed is being reduced. This has the effect of shortening the term.

Martin has a mortgage overpayments v saving guide here.
Locoblade's mortgage calculator spreadsheet here.

J_B.

maninthestreet

don_tudor wrote: »

Hello again, From my understanding of the chap last night the interest and capital repayment are paid together; the interest pays for the interest and the capital goes into a separate account where it sits from jan - dec increasing in value, at a certain point in dec the capital is paid off the amount owing and the new amount of capital owing is then the figure from which the new interest is calculated. this means that if the payments (both interest and capital lumped together) remains the same the proportion of interest you are paying off is less and consequently the amount of capital you are paying off the loan increases and this continues through the years. the offshoot is that the mortgage will finish earlier. Apparently the banks do not offer this type of mortgage because you pay it off quicker and thus they don't make as much dosh out of you. :beer: Now the broker who i spoke to said that using this system and a large amount of loan companies he could;
reduce the term of our mortgage
reduce the monthly amount that we pay
reduce the total amount that we pay
allow us to take payment holidays if we need them without having to overpay in the first place to pay for the holiday the only issue is that if you don't pay, the term will increase.

My thinking is that this seems a very good way to conduct my affairs but is it too good to be true? He is going to come back to us with a quote in the next week or so, and i'm willing to go for it if it is going to save me money. I think the key to the reduction in term and all the other trimmings that go hand in hand is the way that the next years interest is calculated, ie WHEN it is, i believe that in a normal repayment mortgage the capital repaid the previous year is not that relevant to the following years payments, and here lie-th the rub.... i think. Am i allowed to tell where i got this chap from and which company he works for on this forum?:rotfl:

If interest is charged on a daily basis, it would make more sense to apply the capital repayment as soon as possible to the mortgage, not let it sit in some separate account until the end of the year. How is the money paid into this separate account going to increase in value? Is this some sort of interest paying savings account, or some sort of investment vehicle, and what income tax liability arises as a result of any increase in value?