Home | Break-even | Savings

Fixed vs Variable Loans
Calculator - Break-even

How much needed in offset account
for variable to break-even with fixed?

When getting a home loan banks often provide two types of loans, fixed and variable, or a combination. The fixed loan has a fixed interest rate for a number of years and the variable loan has a variable rate which can be changed at any time.

The Fixed vs Variable Loans calculator enables you to quickly see the different cost of choosing a fixed or variable load and how much your monthly repayments will be for a given mortgage (loan), for a given period in years, at the fixed or variable interest rate. Also shown are the yearly payments, total payments and total interest.

Fixed loans currently have a lower interest rate than variable loans. Fixed loans often come with less facilities, whilst variable loans often come with a mortgage offset account. By putting your savings into the mortgage offset account you can reduce the extra cost and if there's enough money in the offset account, the variable loan can be more cost effective than a fixed loan.

Fixed vs Variable Loans calculator

Mortgage

The mortgage is the loan you have borrowed. The loan is assumed to be an interest and capital loan and not an interest only loan.

Years

Enter the number of years the loan will be paid off over. Typically this will be 30, but loans of 25 years used to be common.

Frequency

The default payment frequency is for payments to be monthly. However if you are paid fortnightly or weekly, then taking the payment out each pay period may make payments appear easier.

This shouldn't be confused with the tip where it is suggested people split their monthly amount into two or four, for fortnightly or weekly payments to reduce the interest on their loan. The reason this splitting technique works, is people are paying extra money into their loan each year. There are 52 weeks in a year. Divide 52 by four and you get 13, not 12. Thus an extra monthly payment is being paid using this approach. However, simply asking for payments to be calculated to be weekly or fortnightly, when working out payments has a minimal effect on the interest paid over the life of the loan.

NOTE: For simplicity interest on loans is calculated for the payment frequency. In reality many (possibly most) loans charge interest daily. In effect interest is being charged on interest which is thus compounding. The Effective Interest Rate published by the financial institution is the compounding interest rate, or comparative interest rate. For this calculator use the published annual interest rate, not the effective or comparative interest rate. Interest on any savings is also based on the interest being paid once per period and tax and the Medicare Levy being deducted at the end of each 12 months period.

Fixed Interest

The fixed interest rate you enter is the fixed rate per cent made available from your bank or financial institution.

Variable Interest

The variable interest rate you enter is the variable rate per cent made available from your bank or financial institution.

Payment

Payment is the monthly payment amount you need to pay to service the loan.

For the variable rate loan the payment is for the entire period of the loan based on the current variable interest rate. For the fixed rate loan the payment is for the period where the rate is fixed. Once the fixed period is over, unless you again fix the loan, the loan will then revert the to current variable rate and the monthly payment would then need to be determined for the remainder of the amount owed.

Total Payments

Total Payments shows you how much you will pay over the life of the loan.

Fixed the variable rate this is the amount over the life of the loan at the current variable rate. For fixed rate the calculation works out the payments during the fixed period and then assumes the remaining loan is at the variable rate.

Total Interest

The Total Interest amount is also shown for those who are interested. A figure is provided for both the fixed interest rate (which then reverts to variable) and the variable interest rate.

Savings Interest %

The Savings Interest % is the interest rate you earn on your savings. If you have a fixed rate loan with no mortgage offset account you'll have your savings in other accounts earning 0% or more interest. Because that interest is taxed the amount you end up in your pocket is reduced.

Tax Rate

The tax rate is your current marginal tax rate. That is the highest tax rate that applies to your current income. You can find the tax rates for 2019/2020 at ATO Tax Calculator.

Medicare Levy

The Medicare Levy is currently 2% (as @ 9/9/2019).

If the Medicare Levy Surcharge also applies add both levies together and use the result as the Medicare Levy.

Mortgage Offset Break-even Amount

The Mortgage Offset Break-even Amount is the amount required in the mortgage offset account which then saves as much as having a fixed rate loan and the the break-even amount in an interest bearing savings account less tax and the Medicare levy. If you have more than this amount in the mortgage offset account you are ahead compared with having a fixed rate loan and the money in a savings account earning interest.

Principal Difference at End of Fixed Period

An important question is, at the end of the fixed period, what is the savings or loss by fixing the interest rate compared with having a variable rate. The Principal Difference at End of Fixed Period is the difference between the principal left at the end of the fixed period using the fixed rate and the variable rate. A positive amount means the fixed rate would save this amount of money. A negative amount means the fixed rate has cost this amount of money, or an alternate way of looking at this, is a variable rate would have saved this amount of money.

NOTE: The Principal Difference at End of Fixed Period does not take into account your tax rate, Medicare rate. or how much this money would have made if you put the difference into a savings account. The Principal Difference at End of Fixed Period is the difference between using the fixed and variable rates for the period defined as the fixed period.

In summary, currently the Mortgage Offset Account account is how much is required for a variable rate loan to make up for the lower interest rate charged on a fixed rate loan.

IMPORTANT NOTES

The difference in interest between a fixed rate or variable rate loan in relative terms isn't a huge amount. However, a Fixed Rate Loan is a contract that if broken, can incur considerable cost far exceeding any interest saving. It would be wise to get an estimate of costs from your lender, should you need to break a fixed rate loan, before taking out the loan.

This calculator is based on the fixed and variable rate not changing during the fixed period. A change in the rates will significantly effect the outcome. In the end the choice of fixing the interest rate versus using the variable rate is a risk and you need to beware of and plan for that risk.

Financial Calculators

Future Value Calculator
Present Value Calculator
Fixed versus Variable Loans
Compound Interest Calculator
Australian Tax Calculator
Mortgage Repayment Calculator
Compare Term Deposit Rates Calculator
What's My Time Worth

Disclaimer

The Fixed vs Variable Loans calculator web app comes with no warranty expressed or implied. The Fixed vs Variable Loans calculator web app is only for informational purposes and is not guaranteed to be error free. The information on this page is not intended to be advice.

Privacy

No personally identifying information is required to use this calculator. Your information is not used for any other purposes except for providing the results of the calculation. Information entered into the calculator is not logged or recorded in the site's logs. To our knowledge no record of your data is kept by this site. Your data is private and only you know what you enter.

 
Copyright © 2019-2020 Online Connections