I would like clarification on the following;
I have a house mortgage, interest is calculated daily and charged to
the loan on the last day of each month. That part I am happy with.
I make regular payments (fortnightly) reducing loan balance, they charge
interest, increasing loan balance.
My question is this:
If I redraw (take out excess payments) they debit my loan (increase) for
amount withdrawn.
They also charge interest on amount withdrawn for balance of days remaining
in the month (ie redraw on day 10 charge interest for balance of days
left in month ie; 20) then debit this interest to the loan (increase by interest
amount).
Scenario 1 Loan amount $200,000
Calculate interest daily and charge to loan monthly
and increase loan by determined amount.
Reduce loan by loan repayments.
Fairly straightforward and normal proceedure.

Scenario 2 As above but redraw an amount of $1000 in the month
only difference loan amount will increase by 1000 and
higher interest amount is calculated for that month.
Scenario 3 My situation;
As above for scenario 1/2 except that on the day of
withdrawal interest is charged on the $1000 for balance of
days owing in the month
loan amount 200.000
Payment day 7 1000 199.000
Payment day 14 1000 198.000
Redraw day 21 1000 199.000
Interest 25 199.025

( End of month)
Interest 1000 200.025
I have been charged interest on day 21 on $1000 ($25)
The $1000 increased loan balance and interest is charged
at end of month ( I have now been charged interest twice
on the $1000) and finally the $25 charged on day 21 is added
to the loan (and increases the loan) and I am charged interest
on the interest.

Do I have a problem. How do I solve this problem.
Your input is welcome
Regards
Shalor

Is this a line of credit?

When you say "redraw excess payments" does this mean you are taking money out?

I'm not a mortgage guy, but I'm always interested in learning what I can.

If this is acting like a line of credit, where you are drawing $1000 back out, then you'll be charged interest on interest, as you have noticed. You'll be charged interest on the first $1k and then the 2nd $1k, plus the interest on the interest from the date you took out the excess to the end of the month.

I think.

Hi Mynion,
No not a line of credit. A normal mortgage loan but with the ability to
redraw (withdraw) any excess amounts over and above normal payments
ie. loan calls for a principal and interest payment of $1000 per month.
you choose to pay $2000 per month to reduce loan quicker and save interest.
During the process of any given month you have some out of pocket
expenses, so you redraw (withdraw) the amount required (ie $1000)
from your mortgage account. You have already paid $1000 to cover
mortgage payments and the $1000 you withdraw is the extra you
paid in each month.
Now these redraws are FEE FREE (at no cost/charge)
The question I pose is if the loan amount determined for interest
calculations, each month already includes the redraw amount, then
is it logical to charge interest again (on redraw amount at time (day)
of withdrawal.
Remember Interest is calculated DAILY and charged to the account at
end of each month.
So if balance is 199000 through month interest is calculated on this amount
each day.
If on day 5 you withdraw $1000 from that day interest will be charged on
$200,000 (199,000+$1000) for balance of month (less any payments)
Now that is fine you take money out you increase loan balance you
pay extra interest.
However on top of the interest paid on $199,00 for 5 days and $200,000
for 25 days.
ON DAY OF WITHDRAWAL YOU ARE CHARGED INTEREST ON THE $1000
FOR 25 DAYS (ie $25) AND THIS AMOUNT (INTEREST CHARGE) IS THEN
DEBITED TO YOUR ACCOUNT BALANCE NOW 200025.ON DAY OF WITHDRAWAL, EFFECTIVELY YOU ARE NOW PAYING INTEREST ON 200025
for 25 days NOT 200,000.
NOW REMEMBER THIS..........THIS ABILITY TO REDRAW IS FEE FREE
SO HOW COME YOU GET CHARGED INTEREST ON DAY OF WITHDRAWAL
THIS IS APPLIED TO YOUR ACCOUNT AND YOU PAY INTEREST ON THIS INCREASED AMOUNT.
IF YOU ARE GOING TO BE CHARGED INTEREST ON NEW BALANCE AS A NORMAL PROCEEDURE. WHY CHARGE INTEREST AGAIN ON DAAY OF WITHDRAWAL. IS THIS NOT DOUBLE DIPPING, AND WHEN INTEREST PORTION IS ADDED TO ACCOUNT IS THIS NOT TRIPPLE DIPPING ON THAT INTEREST PORTION.
FIGURE IT OUT IT HAS GOT ME BEAT
regards
Shane

I follow you...

Here's my view on mortgages, and paying extra. Don't do it!
The exception would be lines of credit where rates might be much higher.

But your primary fixed rate type mortgage has no benefits to paying extra. And it seems, in your case, they market the ability for you to take that extra principal back out if you need to, but then hit you with various interest charges.

Do not pay extra. Take the money you would've put into paying down the mortgage and save it in another account, possibly even investing it, but keep it liquid for emergency purposes. Then, when the account has grown to the point where you can liquidate it and pay off the entire mortgage, then do so.

It is beyond the scope of a discussion here, but if you understand that money invested in your home "does not grow", then you wouldn't ever make extra payments. Your home will appreciate in value regardless of the balance of your loan.

And it can get very dangerous. Here's why. Let's say you make those extra payments (and don't redraw them). You save some interest, and your $200k balance is down to $100k, and your home has appreciated to $225k, giving you $125k of equity.

And you and your significant other both get laid off.

You have $125k of equity in your home that you now cannot touch. Why? Because most banks in their right mind would not allow a cash-out refinance, equity line of credit, or equity loan if you do not have decent credit and an income to pay back the payments.

So at a time when you need it most, you don't have access to your money.
But if you took those extra payments, and put them into mutual funds, a money market fund, or even CD's, you'd have access to it when you need it the most.

Retirement can cause this same problem, because if your income in retirement cannot support loan payments, the bank won't approve your loan.

If you are going to retire in the next 10 years, there are some significant things you need to do to prepare, and taking a long, hard look at your mortgage and entire financial picture is a must. You may need to put a HELOC in place, etc.

Bottom line: Don't pay any extra in your situation and you won't have to worry about it. Obviously, they are doing this to discourage doing exactly what you are doing, so 'don't do it!'

I met a guy from South Africa a couple of years ago and he was talking about some things like this. I believe mortgage programs in some countries are designed a bit differently, and the laws are also different from what we are used to in the US.

I know there are programs out there that have an ingenious way of borrowing from a HELOC and paying it to the mortgage. The idea is that the interest on the two accounts are calculated and posted differently, so they take advantage of the "float" to accelerate payments on the mortgage. Each month there is a small gain-that over 10 or 12 years makes a difference equaling years worth of payments. I think this may be what you are attempting.

Timing is everything. Having a computer program and automatic payment system in place, seems essential to the success. Not something I would mess with myself since a small error could give you the type of negative results you talk about.

As for double taxation...you are probably given credit for the money put back in, then charged again when you pull it out. There could also be fees involved with the transfers. Have your accountant review the numbers with you.

Hi,
Thankyou for your responses,I will definately take it all on board.
I am just trying to come to grips with the financial implifications
of mortgage use to the best outcome for ourselves.Banks and other
financial institutions make millions(billions) of dollars on the backs of
us poor home owners as it is. If I can keep(retain) some of that
money from their grasp I will be more than happy.
Regards
Shane