Am I crazy to refinance from 6.95% to 9.5% ?

[younginvestors]

Hi,

I'm currently on a fixed ANZ One Direct loan of 6.95% until 2010. I also have an interest only ANZ One Direct Equity Loan at Std Var rate, which was used for deposit and costs on IP#1.

I have the following restrictions,

• only able to make $10k additional payments on my home loan per year
• the Equity Loan isn't as flexible as a LOC (i.e. can't make automated payments in/out etc) so I have to manually transfer funds each month

If I switch to a more featured product (LOC/Offset) for my H/L I could have all my rent & income deposited into my offset account reducing the interest on my H/L. I also get paid gross and pay my tax quarterly so this could also go to offset my H/L.

Further more, if I were to capitalise the shortfall on IP#1 from a LOC, I could use that shortfall to accelerate paying down my H/L even more.

I have 25 years left on the current H/L. In my calcs, I can pay it off in 14 years using such a structure.

Is this,

a) possible
b) legal
c) sensible

Am I crazy at considering to refinance now to a 9.5% interest rate?

Thanks in advance!

 

[s_t]

No, not sensible.

That's an extra 2.55%.

Take any extra cash you have and stick it in a high interest account (or IP offset). Continue to add to that when you can and let it compound, until your fixed period expires. Then do as you are suggesting with the homeloan. Simple maths says you will be better off financially that way.

 

[Rolf Latham]

Hiya

Dont do it.

Unless you have a huge income there is no way you can benefit from that transaction.

The cynic in me tells me you have been seen by a salesperson selling some form of mortgage reduction system, and a lon to go with it ?

ta
rolf

 

[younginvestors]

Hi Rolf,

I have been 'advised' by a particular company to do it. I then double checked with 2 different Mortgage Brokers who suggested they could do it for a rate less than 9.5%.

I'm starting to think they'll tell me anything to get my business!!

However, in the long term I do know my structure isn't correct and there are much better alternatives.

I'm just struggling with what to do now. Income inc rent is approx $170k.

Thanks,

 

[Rolf Latham]

Hiya

Sure

We can do it for less than 9 %, but what logic would there be aside from the commission paid to the "broker".

If you needed to access equity for the next deal etc etc, then yes I can understand, but simply to have access to a debt reduction stratgey isnt much chop.

There has to be at least a wee bit of commercial reason, and some justificaion as to why youd ask a client to refinance to a new product with that much spread.

ta

rolf

 

[Qlds007]

As Rolf mentioned DO NOT DO IT.

I cannot think of any justifcation in recommending a client do what is being suggested.

Stay put invest the suplus income in a nice interest bearing account, pay the tax on the interest and revisit down the track.

 

[younginvestors]

Hiya

If you needed to access equity for the next deal etc etc, then yes I can understand, but simply to have access to a debt reduction strategy isnt much chop.

I can access the equity under my current loan. I just can't capitalise the shortfall.

 

[s_t]

I can access the equity under my current loan. I just can't capitalise the shortfall.

If you can access more equity (ie. increase size of loan), then surely you can capitalise the shortfall??? Even if you couldn't, it is hardly worth increasing your interest expense on your home by 37% (!!!) to do so!

 

[josko]

You got your answers Young Investors - Good Luck.

Regards Jo

 

[mortgageman]

As the others have said here, don't refinance. With regards to accessing your equity and not being able to capitalise the shortfall, you can manipulate capitalising the shortfall by having some of the borrowed funds sitting in the account that is being debited. The only situation I can think of where it might be worth it is if you came across a very large payout and were able to pay off a large percentage of your loan in a lump sum. Otherwise, sit tight until 2010 and if you can save up some funds in a high interest account so you can pay off more principal when your fixed rate period matures.

Kind Regards,

Cameron Perry
Perry Financial Strategies

 

[twodogs]

If you really want a new loan that much, I'll swap you any one of my 9.5%+ LOC for your 6.95% fixed anytime

 

[younginvestors]

Ok...I'm convinced...Thanks everyone!

If you really want a new loan that much, I'll swap you any one of my 9.5%+ LOC for your 6.95% fixed anytime

I'll keep my 6.95% loan.....thanks maniyak

 

[Bradsdad]

I think (brokers don't have access to them as a lender) you'll find that you're only limited to paying an extra $10k p.a off the fixed portion in that it is free of any penalties. You should still be able to pay additional funds off it. Enquire with One-direct about the penalties (usually a long winded formula). They should be able to give you and indication however at the point in time you wish to deposit funds over and above the $10k. I'd suggest penalties would be minimal as the money can be lent out at a higher rate. Then just weigh up the penalty versus depositing funds in an IB deposit account .