I suspect more of us when we get a home loan look at the fixed rate and variable rate and make a pretty quick decision for one or the other. Variable even though it currently has a higher rate but have an offset account to save money, or fixed because it saves money now.
Of course the big one is which way are interest rates going to go in the near future (1-2 years) and if they're going to go up, fixing the rate is a good idea, but if they're going to go down, variable is a good idea or is it?
When I wrote the Fixed vs Variable loans calculator I recently released, the first version of the calculator only went as far as showing how much money was needed in the offset account to recover the difference of the lower fixed interest rate. That in itself required understanding the financial calculations and formulas, even going back to basics to work out the formula.
However the problem is this solution was incomplete. It assumes the money in the mortgage offset account isn't otherwise generating any interest. That's not realistic. If you have a reasonable sum of money it should be in an account earning interest. In addition each year you need to pay tax on that interest.
So the question really is, how much do you need in the mortgage offset account to not only cover the fixed and variable interest rate difference, but also how much to cover any interest the money would otherwise earn in an interest bearing account, whilst also taking into account tax and the Medicare Levy?
The Fixed vs Variable loans calculator has now been updated to handle the complete picture. By entering the savings interest rate, tax and Medicare Levy, the calculator provides how much is required in the mortgage offset account taking in all those factors.
I have to admit even I wasn't expecting the amount to be as large as it is. If people don't take this into account many people will be paying more for their loan than even they think they are. In a way this is deceptive on the part of the banks. Banks aren't informing people how much they really need in their mortgage offset accounts.
This reminds me of the days when people were buying items just to get rewards points, where the cost of the items often meant they were wasting money since the points had such low value.
I certainly had no idea of how much money really is needed in the mortgage offset account to break even. Now at least people can be better informed by using the calculator.
The only remaining issue is whether interest rates will go up or down. A small change in the rates can have a huge impact on the break-even point.
I hope others find the Fixed vs Variable loans calculator to be useful. If you have a home loan you really should plug in your figures and see if there's a better option for you.
Kelvin Eldridge
Fixed vs Variable loans calculator
Of course the big one is which way are interest rates going to go in the near future (1-2 years) and if they're going to go up, fixing the rate is a good idea, but if they're going to go down, variable is a good idea or is it?
When I wrote the Fixed vs Variable loans calculator I recently released, the first version of the calculator only went as far as showing how much money was needed in the offset account to recover the difference of the lower fixed interest rate. That in itself required understanding the financial calculations and formulas, even going back to basics to work out the formula.
However the problem is this solution was incomplete. It assumes the money in the mortgage offset account isn't otherwise generating any interest. That's not realistic. If you have a reasonable sum of money it should be in an account earning interest. In addition each year you need to pay tax on that interest.
So the question really is, how much do you need in the mortgage offset account to not only cover the fixed and variable interest rate difference, but also how much to cover any interest the money would otherwise earn in an interest bearing account, whilst also taking into account tax and the Medicare Levy?
The Fixed vs Variable loans calculator has now been updated to handle the complete picture. By entering the savings interest rate, tax and Medicare Levy, the calculator provides how much is required in the mortgage offset account taking in all those factors.
I have to admit even I wasn't expecting the amount to be as large as it is. If people don't take this into account many people will be paying more for their loan than even they think they are. In a way this is deceptive on the part of the banks. Banks aren't informing people how much they really need in their mortgage offset accounts.
This reminds me of the days when people were buying items just to get rewards points, where the cost of the items often meant they were wasting money since the points had such low value.
I certainly had no idea of how much money really is needed in the mortgage offset account to break even. Now at least people can be better informed by using the calculator.
The only remaining issue is whether interest rates will go up or down. A small change in the rates can have a huge impact on the break-even point.
I hope others find the Fixed vs Variable loans calculator to be useful. If you have a home loan you really should plug in your figures and see if there's a better option for you.
Kelvin Eldridge
Fixed vs Variable loans calculator
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