30 years loan vs 20 years loan

[HattrickNZ]

Why pay the loan off today with todays' pre inflation money when the loan stays the same value during the term and you can pay it off tomorrow with tomorrows' post inflation money?

Are you agreeing with lisica here? Is 30 years better than 20 years?

Sorry but yu got me on the pre inflation money v post inflation money. Which one is greater? And is the interest on the loan a factor?

[Lissica]

Are you agreeing with lisica here? Is 30 years better than 20 years?

Sorry but yu got me on the pre inflation money v post inflation money. Which one is greater? And is the interest on the loan a factor?

The original loan is locked in at what it was worth at that point in time. If you took out a $100,000 loan in 1990, it's worth a lot less today than it was 26yrs ago. Hopefully the rental income has gone up a lot in that time.

Assuming inflation to be the norm of course, which has been the case for most countries for most of this century.

[Lissica]

Hi Lissica

Thank you for your replay. Your reply enable me to see thing from an different angle.

I have some question about loan to value ratio, in this LVR that banks look at.
- If loan mean only the principal, or principal plus interest? If it means principal only, using a 30 years term won't affect my risk and debt service ability compares to a 20 years loan?
- When talk about value, is it the value on valuation reports? Not the market value? or the purchase price?

Sorry, I meant how much gearing you have overall. The banks will choose some level of equity where they feel confident to lend for each particular property, their LVR. We have four rentals with 26% equity, but if you took in consideration our other investments, that increases to 90%. ie, our company has very low borrowings overall, which is why we're looking for a couple more rentals or a commercial property at the moment.

[Lego_Squared]

Why pay the loan off today with todays' pre inflation money when the loan stays the same value during the term and you can pay it off tomorrow with tomorrows' post inflation money?

Yes - but interest rates will rise with inflation so there is no free lunch.

Although, if you can fix long at lower rates then this effect will be mitigated. Imagine if you were able to fix now for 30 years at 5%, and we then entered a highly inflationary period where inflation was >5% and mortgage rates >10% . I agree that with tax-deductible debt though there is no hurry to pay it off (contingent on equity constraints).

[primal]

What about 30 years with extra repayment (instead of 250 make 400pwk)

[snobilo]

as soon as you increase payment it reduces the term of your loan.

[Nick G]

FWIW my strategy is IO but all cashflow goes into an offset account, meaning I no longer am paying interest on that amount.

You could do that with principal payments also, have a floating loan and put $x into an offset account each week. That gives you some flexibility on the day when the bank's computer decides you and it are no longer friends but you still want to buy things.

[snobilo]

Nick does it not bother you paying that extra 1%ish in interest by being floating? It seems to be just personal preference but the interest you save fixing at 4% is quite alot compared to 5.7% floating, I'm presuming you take your route due to cash flow reasons and the uncertainty of interest rates?

cheers

[Lissica]

Yes - but interest rates will rise with inflation so there is no free lunch.

Although, if you can fix long at lower rates then this effect will be mitigated. Imagine if you were able to fix now for 30 years at 5%, and we then entered a highly inflationary period where inflation was >5% and mortgage rates >10% . I agree that with tax-deductible debt though there is no hurry to pay it off (contingent on equity constraints).

Interest rates are tied to annual inflation, but there is a compounding effect of inflation on the principal.

[Nick G]

Nick does it not bother you paying that extra 1%ish in interest by being floating? It seems to be just personal preference but the interest you save fixing at 4% is quite alot compared to 5.7% floating, I'm presuming you take your route due to cash flow reasons and the uncertainty of interest rates?

cheers

Hi Sam

My floating at the moment is at 4.65% so it's not such a worry. I think I'm going to fix half the debt to 5 years soon however.

Cheers

Nick

[snobilo]

Ah good deal then, I'm presuming you use Westpac offset?

[Nick G]

BNZ total money but I'm sure it's the same thing.

[James.wu]

FWIW my strategy is IO but all cashflow goes into an offset account, meaning I no longer am paying interest on that amount.

You could do that with principal payments also, have a floating loan and put $x into an offset account each week. That gives you some flexibility on the day when the bank's computer decides you and it are no longer friends but you still want to buy things.

Hi Nick

This sounds like a good idea, and it's something I have never thought of. By offsetting your loan, you can pay less and less interest in time. I assume you can still pay off the loan in full, say in 20 years, if you want to?

[Nick G]

If floating then yes. Some banks charge a fee for paying back a fixed one early but since you refix closer to the date you can structure or negotiate at the time.

[ivanp]

My floating at the moment is at 4.65% so it's not such a worry.

So, BNZ provides you a margin discount of 1.14% (their carded rate for TotalMoney floating is 5.79% at the moment). That is an amazing discount!

Do you know if the same 1.14% discount semi-automatically applies to any fixed rates too? If so, you could get 1- or 2-year rates sub 4%, or 5-year in low 4%...