Mortgage Secrets #3 How to Structure Your Mortgages   Interest Rate Averaging

Mortgage Secrets #3 How to Structure Your Mortgages Interest Rate Averaging

so we're going to talk about interest rate averaging and what's the best way to structure your mortgages so that you're not going to get stuck on high rates for a long period of time and then you're also not going to get caught out selecting a one-year rate and then the next year the rates have skyrocketed and you're going to be exposed to that that their big change so a lot of people get confused should I pick one year so I pick two years so I pick three year rate how should I struck my more structure my mortgages and how do I make sure I'm always getting the lowest rates and so general best practice is called interest rate averaging and so what we get is less risk more reward and what we're trying to do is measure against having some certainty and accepting there's going to be a little bit of uncertainty and if I said to you hey look let's pick a one-year rate let's go for what 4.1 percent and then next year after that expires it's up to six or seven percent what's going to happen as your interest rate expenses are going to almost double so that's not going to be a fun time and what we're trying to do is split that up so that you don't have that uncertainty of not knowing what the rates are and having unexpected cost but you got the benefit of having the lower rates for a period of time and so this split is called interest rate averaging in in just the example we're going to look at today is 600,000 of lending and we're gonna put some on one-year someone to year at some one three and so we're gonna put two hundred thousand for each of on each term so we're gonna break it down so this is 2018 2019 2020 and so if you took your six hundred thousand and you put all of it on a three-year four point seven right there's two hundred thousand of lending excuse me would be nine thousand four hundred per year for those 200,000 I'm leaving and if you did that for three three years for the all 600,000 so what that means is if you fix all of your 600,000 on a three-year four point seven percent rate it's going to cost you twenty eight thousand two hundred dollars an interest expense annually so this is certainty of three years on four point seven percent but you say to me hey look I'd like I've seen this four point one percent right I'd like to take advantage of that so what would say is all right let's split your six hundred into three periods three portions 200k on three-year turn account to you at 200 count four point one percent for one year and so what does that look like well in 2018 your interest expense is going to be nine thousand four hundred for the 200k on the three-year portion eight thousand six hundred for the four point three percent two year portion of 200 and then that four point one percent 200k it's eight thousand two hundred and so what does this mean your first year you're only going to pay twenty six thousand two hundred and so instead of paying twenty eight thousand pay twenty six thousand so in your first year just splitting the mortgage up you're going to save two thousand dollars and you can put that money into your pencil principal repayments or you know go on holiday or spin it however you want now the student T of having the three years does mean it cost you more money and that uncertainty of taking all of this one year rate means you don't know what you're gonna have to be faced with in the year two and year three and if you work for all two years you wouldn't know what's going to be in the air three but the interesting thing to keep in mind is let's say this year one rolls over and now you've got a another 200k portion you'll fix it for one or two years this would have to be you if this one da rate was 4.7% then this is going to be 9400 and you add these up you're still going to save $800 so you can see that even if the one year interest rate spikes quite a bit that you're still going to save money doing interest rate averaging and there's a couple of different benefits firstly obviously there's annual savings and the protection of not being exposed to massive swings and interest rate changes but also what it means is so you fix this again for another one or two years and when this one expires you fix it for another one year what happens is everything is probably going to come up to Bijoux at the same time after three years and it means that you can you can go and get and then the cash back if you're open to change your being so cash back at the moment for six hundred thousand might be you know let's say four and a half thousand and by having it all come off at the same time that means the break fees are going to be zero well it might be a discharge B or something but doing the strategy gives you good flexibility and and what it means is if we have a look at this graph quickly instead of having big swings and rates every three years and it's unpredictable what we're trying to do is save money every year by having small portions coming up instead of having a big portion folks for a long period of time and making these little small increments makes it much easier to get your top-ups approved and that gives you more you know negotiation power because it means that list of your mortgage is going to be liable for break fees and you get to talk to your mortgage advisor or banker a little bit more often which despite the frustrations is actually probably an advantage so hopefully I've explained interest rate averaging well I'll try some as the points below


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