Velocity banking

tom1ie

Hi all
Just wondering has anyone heard of velocity banking. As far as I can tell it seems to be paying off a large debt (mortgage) with a small interest rate, ie 3%, by using personal debt ie a credit card or in America a heloc (line of credit). The premise being the high interest rate on the smaller loan costs less interest than the small interest rate on the large loan.
You use the smaller loan that you take out and throw that off the principle of the mortgage.
Example:
100000 mortgage.
Take out 10k line of credit
Put 10k loan off principle of mortgage.
Mortgage= 90k. (Monthly repayment slightly reduced)
All your incoming money (wages) are put off the 10k line of credit (l.o.c), so if wages are 5k a month loc is reduced to 5k, but living expenses (other bills, car, childcare, plus the interest on loc which could be say 21%, etc) comes out of loc so increases loc to 7k. That’s month 1
Month 2:
loc- wages = 7-5=2+living expenses+interest =4K loc
Month 3:
4-5= -1+ 2=1k loc
Month 4:
1-5=-4+2=-2loc so at this point your loc is clear.
You then take out loc of 10k again and put it off mortgage, which is reduced to 80k.
So in approx 4/5 months you’ve paid 20k off mortgage.

I think this is the idea I’m still trying to run figures and find out if this actually works?
Has anyone tried this?
It sounds a bit too good to be true to be honest.

johnb25

I haven't heard of it, but unless you have a large margin between monthly salary and expenses, there is a real risk of getting trapped in expensive credit card debt. And if you do have that margin, why not just overpay your mortgage each month?
Sounds like a nice idea, but not for me thanks!

1st On

johnb25 wrote: »

I haven't heard of it, but unless you have a large margin between monthly salary and expenses, there is a real risk of getting trapped in expensive credit card debt. And if you do have that margin, why not just overpay your mortgage each month?
Sounds like a nice idea, but not for me thanks!

Have heard a few people on about this recently, and from my understanding it is too good to be true. Johnb25 is right, the whole premise is based on having a surplus of income over your expenses and putting every cent of that surplus into the mortgage - however leave no room for unexpected costs / large one off expenses which could result in people getting trapped in more costly short term debt.

Lodging any surplus income at the end of the month on a continual basis will get the same result without running the risk of getting trapped in the costly credit card / heloc debt.

daheff

tom1ie wrote: »

Hi all
. The premise being the high interest rate on the smaller loan costs less interest than the small interest rate on the large loan.

It sounds a bit too good to be true to be honest.

How can a higher interest rate end up costing less than a lower interest rate?

10k @ 10% is more interest than 10K @3%


The only way you work out better is if you have a high interest mortgage or a very low interest short term loan. You are then better off by the differential between high rate and low rate.



In any case, if you have additional funds at the end of each month, why not use that to pay down your mortgage?? Its effectively the same thing...just you need to wait your 3-4 months to raise 10k.