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Interest Rate Increases – Who Cares?

HELOC Mortgage Stress Relief

Interest Rate Increases – Who Cares?

20/02/2017 @ 6:10 am
by David_Seamans
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It was almost twenty years ago, a representative of one of the world’s largest banks showed a room full of sales people how the Home Equity Line of Credit loan works and should be used.
It has haunted me ever since.
Why would someone NOT want to save potentially hundreds of thousands of dollars and knock many years off their home mortgage?
Why do people suffer stress when they have a mortgage?

The finance industry talks of a “percentage point” here and there implying that competition on the rates is the only improvement possible.
Most of the “experts” talk of the double digit interest rates that we had in the 1980’s and try to tell Mr and Mrs Average Mortgagee that this is something to worry about.
Or is it?
Let’s work through the two scenarios mentioned:
  • Chasing after the lowest interest rate advertised and
  • Working about double digit interest rates.
Why? Well the scenarios are basically the same.
The Home Equity Line of Credit means that:
  • all your income (working towards minimal leakages) is put on your mortgage
  • you pay for everything on credit card for up to 55 days
  • and when the credit card falls due for payment (interest free), the funds are withdrawn from the mortgage.
Individual
Gross $ (pa)
Less Tax (pa)
Nett $ (pa)
Nett $ (pm)
Husband
$83,902
$18,815
$65,087
$5,422
Wife / Partner
$70,392
$14,424
$55,968
$4,662
Total
$154,294
$33,239
$121,055
$10,084
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Spending
(Rent Excluded)
(No savings)
..
$4,000
PURCHASE PRICE
..
$777,500
Less Deposit
20%
$155,500
Mortgage
..
$622,000
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Repayment
Monthly
$3,189.00
Term
Years
30
Interest %
Currently
4.6%
..
Comparison
4.99%

 

Required Input

 

First Person Monthly Nett?
Second Person Monthly Nett?
Other Income Monthly Nett?
Monthly Spend?
Mortgage Pay Out?
Interest rate?
Mortgage Balance
Results

 

Pay Out Date
$4,000
Loan Term (Years & Months)
$4,000
Total Interest
$4,000

 

%
4.99% (Baseline)
2.0%
9.8%
12%
TOTAL INTEREST
$176,147
$57,792
$589,118
$1,299,781
DURATION OF MORTGAGE
10 years & 10 months
9 years & 4 months
16 years & 6 months
26 years & 3 months
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Traditional Mortgage Monthly Repayments (Over 30 Years)
$3,335
$2,299
$5,367
$6,397
Total Interest
$578,600
$205,640
$1,310,120
$1,680,920
The interpretaion of the chart above is that no matter what interest rate is being charged on the Home Equity Line of Credit, the mortgagee is ahead of the traditional mortgage.
It is because the mortgagee is putting all income towards the mortgage, using the credit cards for the monthly living expenses and redrawing on the mortgage to pay out the credit card(s) accruing no interest, there is no change in the earning and spending behaviour of the mortgagee.

Thus the only thing that can vary is the length of the mortgage, which only in the horrendous case of 12%, is still not anywhere near the tradtional 30 years used in this calculation.

But there is no change in the income generating nor spending behaviour of the mortgagee and thus NO STRESS.

However the traditional mortgagee is stuck with payments over 30 years. Remember, our couple was earning $10,084 per month so when the 12% repayments climb to $6,397, they have to find extra money to cover the mortgage payment (which is consuming 63.4% of their disposable income) They are now having to “pull in their belts” as they no longer have $4,000 to spend on their lifestyle as “lifestyle income” is now down to $3,687.
In summary, you are always further ahead with a Home Equity Line of Credit enabling you to. without any stress whatsoever, withstand interest rates upward movements and to take better advantage of interest rates downward movements.

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