$28k break fee before buying first IP – borrowing capacity impact?

I'd like to pass this by some wise/experienced SSers. I'll be buying my first IP before the year is out and want to explore this scenario in terms of how it might affect my borrowing capacity.

Current situation:
- PPOR loan fixed for another 12 years 8.09% (I know, I know)
- Current loan balance $243k ($20k interest a year)
- Also have an equity loan for $60k, full balance in offset currently (overall LVR 87%)

Scenario:
- Break fixed loan*. Fee makes new PPOR loan balance $271k. LVR 93% as a result.
- Fix loan ~5% for ~5 years

Ok. Where's my borrowing capacity at now? I'm saving $6.5k on interest, but LVR is 93%.

If more info is needed, I'm happy to provide it. And if any brokers want to chat, feel free.

* I'll consider moving out of my PPOR (thus turning it into an IP) prior to breaking if I can claim enough of that $28k for it to be worthwhile.
 
What's the actual question? Is it "will me capitalising the break costs on my loan going to affect servicing"? If so then the answer is yes but not by much because you are increasing your loan.

Also consider the LMI payable on the increase loan amount and LVR.
 
Also consider the LMI payable on the increase loan amount and LVR.

Thanks for that tip too. Something I'm mindful of. For the purpose of my question I haven't gone into all the details but were I to break, I'd plan on dodging excessive LMI by timing it after a lump sum repayment (and more growth, which is unstoppable at the moment).
 
Thanks for that tip too. Something I'm mindful of. For the purpose of my question I haven't gone into all the details but were I to break, I'd plan on dodging excessive LMI by timing it after a lump sum repayment (and more growth, which is unstoppable at the moment).

How much can you pay off as a lump sum and how often?
 
Another question regarding loan structure after the break. I'll talk to a broker to iron this out, but some prior input would be appreciated.

I'm thinking:

Split the loan into say, 5 pieces of $55,000.

- 4 x fixed
- 1 x variable

(or some combination thereof)

That way, if desired, I'd be able to pay up to $40,000 annually of extra repayments* (unlikely this amount will ever be an impediment) PLUS park excess funds in an offset against the variable. Options, options.

Am I missing anything? Other than the fact some lenders might not split a loan that many times? Any other ideas for structuring it?

* assuming $10k annual limit on each of the fixed
 
Let's assume that interest rates are getting close to the bottom (perhaps, perhaps not). If this is the case, then you're planning to break when the costs of doing so are at about their highest.

Is it really necessary to fix now? It's a good feeling to pay less interest, but it doesn't practically improve much for you given there's a cost to break.

If you're intending to access your equity, you can still do that with a fixed rate product. If you want to save money, it will probably cost more to break than it will save. About the only reason to break the contract would be if there's a strong reason to switch lenders.

Also ask yourself why you fixed in the first place, then think about why you're considering refixing for 5 years.
 
Cheers Alex.

Let's assume that interest rates are getting close to the bottom (perhaps, perhaps not). If this is the case, then you're planning to break when the costs of doing so are at about their highest.

Is it really necessary to fix now? It's a good feeling to pay less interest, but it doesn't practically improve much for you given there's a cost to break.

If you're intending to access your equity, you can still do that with a fixed rate product. If you want to save money, it will probably cost more to break than it will save. About the only reason to break the contract would be if there's a strong reason to switch lenders.

Also ask yourself why you fixed in the first place, then think about why you're considering refixing for 5 years.

No, it's not necessary to fix now. I'm viewing this through a longterm lens though.

I've considered remaining fixed and breaking down the track when a) principal is lower and b) interest rates, probably, are higher thus break cost lower. I imagine I could be waiting 2-3+ years for this to be worthwhile though.

By my calculations, just based on interest savings, it will take around 6.5 years to recover the break cost. However, there are other considerations:

- My $10k extra repayment limit is an impediment – I'm easily meeting this.
- No offset.

If I'm able to park future IP deposits/holding costs etc in a offset account, that 6.5 years will diminish to a more reasonable figure, given the principal I'm paying interest on will be notably lower.

I fixed for a stupidly long time by taking advice from a very conservative parent. Lesson learned.

Love to hear your thoughts Peter. As always, I'm open to all input.

Cheers :)
 
a. dont fix for longer than you can reasonably foresee your circumstances
b. dont fix money you can foresee paying back during the fixed rate period.
c. dont fix based on rate, fix on personal need/circumstance
 
I've considered remaining fixed and breaking down the track when a) principal is lower and b) interest rates, probably, are higher thus break cost lower. I imagine I could be waiting 2-3+ years for this to be worthwhile though.

By my calculations, just based on interest savings, it will take around 6.5 years to recover the break cost. However, there are other considerations:

- My $10k extra repayment limit is an impediment – I'm easily meeting this.
- No offset.

All good reasons to break the fixed rate but if I may play devils advocate a little longer...

* Given it will take 6.5 years to recover break costs (which I think is quite good, most people never recover them within the remaining fixed period), what happens if variable rates increase?

The $10k repayment limit is a good reason to break however. Paying down non deductable debt (if by direct payment or offset account) is always a good thing.

If in your position and I did decide to break, I don't think I'd look at a 5 year rate for non-deductable debt. 5 years is a fairly long time. Personally I find 3 years more comfortable to work with.
 
All good reasons to break the fixed rate but if I may play devils advocate a little longer...

* Given it will take 6.5 years to recover break costs (which I think is quite good, most people never recover them within the remaining fixed period), what happens if variable rates increase?

The $10k repayment limit is a good reason to break however. Paying down non deductable debt (if by direct payment or offset account) is always a good thing.

If in your position and I did decide to break, I don't think I'd look at a 5 year rate for non-deductable debt. 5 years is a fairly long time. Personally I find 3 years more comfortable to work with.

Please, continue to play devil's advocate. It's really helpful.

If variable rates increase (no doubt they will, given time) this 6.5 year figure may protract. BUT...

One reason 5 year fixes are appealing is that, given I'll be able to offset/pay extra with my proposed structure, I project that this 6.5 year "recovery" figure will contract to < 5 years. Making it worthwhile, even if the fixed loans come off after a good deal of upward movement (as long as it's not >8%).

3 year fixed have their appeal too. More manageable period of time, better rates etc. I'd also considered that if I split the loan into bits, it opens up the option of fixing each for an independent duration (if it will work to my advantage).

Keen to hear your thoughts again, Mr Advocate ;)

Cheers.
 
There are a couple more variables:

1) move out and change the property to an IP. The interest is deductible.

2) if you break the loan you can offset / pay extra, but given your situation shouldn't you be more focused on increasing your asset base? That means using extra money to buy more instead of paying off existing loans.
 
There are a couple more variables:

1) move out and change the property to an IP. The interest is deductible.

2) if you break the loan you can offset / pay extra, but given your situation shouldn't you be more focused on increasing your asset base? That means using extra money to buy more instead of paying off existing loans.

Thanks mate.

1) Been considering this for some time. One hitch. It's now grown into a great source of income (airbnb) so turning into an IP has lost a significant amount of its (financial) appeal.

2) Yes, increasing my asset base is priority #1. Paying the PPOR off is not an immediate goal (rather, a 10 year one.).

The way I want to play this is to sit deposit/holding costs for future IPs in an offset against the PPOR loan and, at my discretion, occasionally pay lump sums then pull the funds immediately back out via equity loans.

Thoughts?
 
Thanks mate.

1) Been considering this for some time. One hitch. It's now grown into a great source of income (airbnb) so turning into an IP has lost a significant amount of its (financial) appeal.

2) Yes, increasing my asset base is priority #1. Paying the PPOR off is not an immediate goal (rather, a 10 year one.).

The way I want to play this is to sit deposit/holding costs for future IPs in an offset against the PPOR loan and, at my discretion, occasionally pay lump sums then pull the funds immediately back out via equity loans.

Thoughts?

why has it lost its appeal
 
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