ANALYSIS: You may have seen a video doing the rounds on TikTok, informing you that you can “beat the banks” by paying $1 a day on your home loan to stop interest accumulating on your account.
The theory goes that banks won’t charge interest on any day a payment is made. And if you make this routine payment, when you make your regular payment at the end of the month, it will all go on to primary, enabling you to smash down your home loan much quicker.
There’s problem and good news.
The good news is that a few of the theory behind the concept works.
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The problem is that it’s going to cost you a lot more than $1 a day to stop interest accumulating on your home loan.
Massey University banking professional Claire Matthews said somebody with a $600,000 home mortgage and a drifting rates of interest of 7.5% would require to pay $123 a day to keep interest at bay, and permit their complete payment to go to the financial obligation owing.
“That’s on the basis that interest is accruing at about that rate, with an adjustment to recognise that the loan balance would be slightly smaller each day as a result of each payment until the bank debited the monthly interest charge.
“But all you are actually doing is paying off the interest rate over the month. Yes, you would end up paying off your loan slightly quicker because you would accrue less interest, but that’s the same reason fortnightly payments are better than monthly payments, and even if you divided your fortnightly payment into 14 daily payments you would pay slight less interest
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Higher interest rates mean you can save more money by making bigger loan repayments.
“Essentially the computer looks at the loan balance each day and says ‘what is the balance today after all transactions’, and accrues a daily charge on that basis.”
She said the idea that the bank would not permit interest to accumulate on any day a payment was made was inaccurate.
You would likewise need to be on a drifting rate, which is greater than a set rate, to make a great deal of routine payments.
A representative for ANZ said it had actually not seen any consumers trying to follow the “hack”.
But she said individuals who wished to make additional payments might do so, even if they were on a fixed-term rate.
“If it’s the first increase that year, you can increase your regular repayments towards your home loan by up to $250 a week without incurring [a fee]. Plus, each year you can make an extra lump sum repayment that’s no more than 5% of your current loan amount without incurring [a fee].”
She said if somebody wished to break a set term to alter the structure of their loan, and was relocating to a greater rates of interest, there may not be a break cost charged.
People with a drifting rate might pay back any quantity they desired at any time without being charged a cost however there may be a minimum level of payment needed.
“We recognise not everyone is in the position to do this, but people who can put a little bit extra on their home loan payments will pay less in interest and save money over the long term.”
Paying additional can make a huge distinction to the cost of your loan over the long term since it goes directly to the quantity owing, indicating there is less financial obligation to bring in interest in future.
If you have a $600,000 loan with a rates of interest of 6%, you’ll pay $1783 a fortnight if you have 25 years staying. If you can increase that payment to $2000, you’ll clear the financial obligation 5 years early and save more than $130,000 in interest payments.
