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

Hi.

1. Depending on the lenders you use, the impact of this change on your serviceability could be both positive and negative

Example: with ANZ; they take in consideration " loan balance" when calculating serviceability of existing debt- so in this case it will have a NEGATIVE impact....but given it's only $28k ( + LMI?) it's negligible


With NAB; they take "actual" repayments - so this "could" have a positive impact; given your loan is going from 8% down to 5%.

2. As mentioned it may "look" good to break this loan; but really work out if there's any the benefit on your overall goal.- what ever your goal may be

3. Your going from a 10+ fix rate down to a 5 years...why not keep it as variable since it sounds like your plans may change ( PPOR to IP etc) OR as mentioned stick with a lower fix rate period of 2-3 years.

4. You can break your loans into different splits; not all banks will accept this structure though as it's a LOT of work for the bank ( but im presuming your with Westpac or CBA, given your 12+ fix rate term??); Just note each product "split" has a MINIMUM loan amount...

5. Im still not 100% convinced on your overall goal??? what are you trying to achieve? improve serviceability? buy IP? release equity? reduce debt level? pay down ppor?

6. Airbnb is great; stayed in HK for one recently :)
 
umm, if its an airbnb, then its already an investment property.

Or part of it is, as is part of the loan.

Referring to the title, the borrowing capacity IMPACT.

The impact is on your state of mind, your psychology, regarding wealth and investment. Yes, breaking now might be more expensive than breaking when rates are higher, but whens that going to be? When they are higher, perhaps there will be another reason to wait a little longer.

this fixed rate is holding you back, cut it loose.
 
Question for the brokers. Would this sort of loan allow substitution of security? Switch the fixed to a new IP?

Given he is with CBA - Yes.

Does substitution of security involve re-settlement of the fixed loan? If not, the tax implications might be negative in terms of it's not a 'new' borrowing to purchase the IP, though I'm not sure how else you could construe it since you end up with another property and another loan.
 
Thanks Mick. Good food for thought.

I'm aiming to accelerate my acquisition of assets now (ready for IP#1), and in the future. Exploring the break scenario is to potentially 1) Increase serviceability 2) Increase borrowing capacity 3) Reduce PPOR debt to zero within a decade.

Keeping some/all of the loan as variable is also under consideration, particularly if fixing portions at a lower rate won't increase my borrowing capacity much/at all.




Alex, Aaron. Can you guys elaborate? I'm a bit unclear.

Are you suggesting that I could buy an IP with a variable loan, then essentially "swap" securities, so my PPOR secures the variable loan, the IP secures the fixed loan, meaning I now have an IP loan locked at 8.09% for another 12 years, the interest on which will now be deductible etc…?
 
Alex, Aaron. Can you guys elaborate? I'm a bit unclear.

Are you suggesting that I could buy an IP with a variable loan, then essentially "swap" securities, so my PPOR secures the variable loan, the IP secures the fixed loan, meaning I now have an IP loan locked at 8.09% for another 12 years, the interest on which will now be deductible etc…?

Correct in terms of the mechanics. I can't comment on the deductibility bit. Obviously this is on good if you can deduct the interesto on the 8% fixed loan. I don't know enough about what actually happens in a security substitution to comment.
 
I doubt the ATO would look kindly on security substitution and then breaking a fixed rate........

The property is already income producing, you can break it now and claim at least part as deductable. granted CGT implications, but they are usually minor in the larger scheme of things.
 
I doubt the ATO would look kindly on security substitution and then breaking a fixed rate........

The property is already income producing, you can break it now and claim at least part as deductable. granted CGT implications, but they are usually minor in the larger scheme of things.

Not going to comment on the implications of airbnb income on renting out the PPOR, but re the substitution, my suggestion (if possible) would be to substitute and just let the fixed loan run.
 
not breaking the fixed rate would only marginally improve income when deductable, and wouldnt have any noticeable effect on borrowing capacity.


From a lenders perspective substitution is just that, selling the existing, and transfering to a new property. Keeping the old property might be a little bit dificult. I havent ever come across such a scenario, perhaps one of the other brokers can comment.
 
not breaking the fixed rate would only marginally improve income when deductable, and wouldnt have any noticeable effect on borrowing capacity.

8% non-deductible versus 8% deductible, at a 30% marginal rate, is 2.4% of interest. I would consider that more than a marginal improvement.

Granted you're exchanging that for 5% non-deductible, but the benefit is still about 1%.
 
yes our definitions of marginal differ.

Its like arguing with people about rate. Yes, ubank has a low rate, itll save you thousands every year. Having the correct finance structure will make you ten times that.
 
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