At a cross road

[Joanne]

Hi All,

I'm new here so please be gentle. We migrated in Australia in 2005. Currently we have a PPOR and 1 IP. Here is our financial situation:

PPOR:
Debt: 300k
Offset: 300k

IP:
Debt: $350k
Fixed for 3 years @ 6.99%

Our loans are X-coll. We would like to purchase another IP in maybe 6 months. Could you please advise:

a.) Is it better for us to remove the cross-collateralization on our loans before taking more debt?
b.) Should we leave the 300k in our offset? Or should we invest it?
c.) How long will bank allow us to park the 300k on our offset and not pay any interest?

Thank in advance for any advise.

 

[The Sniffer]

Hi All,

I'm new here so please be gentle. We migrated in Australia in 2005. Currently we have a PPOR and 1 IP. Here is our financial situation:

PPOR:
Debt: 300k
Offset: 300k

IP:
Debt: $350k
Fixed for 3 years @ 6.99%

Our loans are X-coll. We would like to purchase another IP in maybe 6 months. Could you please advise:

a.) Is it better for us to remove the cross-collateralization on our loans before taking more debt?
b.) Should we leave the 300k in our offset? Or should we invest it?
c.) How long will bank allow us to park the 300k on our offset and not pay any interest?

Thank in advance for any advise.

A. Optional. Crossing only two is a very simple structure - keep the next purchase standalone. If you were going to pay break costs on the fixed to restructure I would wait until the fixed term is up before uncrossing.

B. If you invest it you would start paying interest on your home loan again. If you need to invest 100k, I would reduce the loan by 100k (leaving 200k home loan and 200k in offset.
You then re-borrow the 100k as a separate investment loan.

C. As long as you like.

Your new structure would look something like this:

*Home loan 200k - secured by home + 1 INV
Fixed loan 350k - secured by home + 1 INV
200k in offset against home loan

100k secured against your home only
New loan - 80% of new purchase

*note. If the existing home loan was in place before the existing investment loan, it will be secured by the home only (not crossed). Only the investment loan will be crossed back to the home.

Depending on the lender you can uncross a fixed loan without fees. Would need to know the bank and current value of the IP.



Snif

 

[Peter_Tersteeg]

a) Yes, cross collateralisation isn't doing you any favours. Get rid of it whilst it's easy and of negligible cost to do so.

c) You'll be able to keep the money in the offset indefinitely, although the loan will likely amatorise to $0 within 15 years anyhow (exactly what happens depends on the loan types and structure).

b) is a bit more complex...

If your current house will be your PPOR indefinitely, you should acutally move your money from the offset and pay out the non deductable loan. You can then access your equity back via an investment loan and use this for deposits on additional IPs. This would make the interest on your home loan tax deductable.

If you intend to convert your PPOR to an IP at some point, keep your money in the offset. What you do from there will depend on if you're buying an IP or a new PPOR in the future.

 

[Rolf Latham]

Hi Joanne

Welcome !

What are the values of the 2 existing properties please ?


ta
rolf

 

[Mick C]

Hi All,

I'm new here so please be gentle. We migrated in Australia in 2005. Currently we have a PPOR and 1 IP. Here is our financial situation:

PPOR:
Debt: 300k
Offset: 300k

IP:
Debt: $350k
Fixed for 3 years @ 6.99%

Our loans are X-coll. We would like to purchase another IP in maybe 6 months. Could you please advise:

a.) Is it better for us to remove the cross-collateralization on our loans before taking more debt?
b.) Should we leave the 300k in our offset? Or should we invest it?
c.) How long will bank allow us to park the 300k on our offset and not pay any interest?

Thank in advance for any advise.

A - if it's fixed it might be to costly to break...when was this fix done?
But yes if you can un x-cross do it....it will help- Just need another valution done. From your experiecne has the value of the property gone up by at least 10%???

B- Ummm yes and no...need to see what your whole finacnial are like and your "future requirments"

C- as long as you like.

Regards
Michael

 

[Joanne]

A. Optional. Crossing only two is a very simple structure - keep the next purchase standalone. If you were going to pay break costs on the fixed to restructure I would wait until the fixed term is up before uncrossing.

Hi Snif,

Unfortunately we only fixed our IP loan last October. A friend told me that if our fixed rate is lower than the current variable rate, the bank will not charge us any break cost. I'm not familiar with this rule. Is this true?

 

[mary&mat]

Hi Joanne,

I've been told this by my bank (Westpac) re one of my fixed loans. The guy actually said the bank would almost pay me to break the 4.99% fixed.

I don't think it's a 'rule' per se, just means it allows the bank to make more money off you if you break a lower fixed rate to go onto their higher variable rate

 

[Joanne]

b) is a bit more complex...

If your current house will be your PPOR indefinitely, you should acutally move your money from the offset and pay out the non deductable loan. You can then access your equity back via an investment loan and use this for deposits on additional IPs. This would make the interest on your home loan tax deductable.

If you intend to convert your PPOR to an IP at some point, keep your money in the offset. What you do from there will depend on if you're buying an IP or a new PPOR in the future.

Hi PT,

We never really thought about converting our PPOR to IP until you've mentioned it. We had lengthy discussion about this last night. Our decision was if we can afford it, we would like to move to a large house in 4 - 5 years time and convert our current PPOR into IP. And as you said we will just keep the money in the offset.

 

[Joanne]

Hi Joanne

Welcome !

What are the values of the 2 existing properties please ?


ta
rolf

Thanks for the welcome Rolf!

Unfortunately we don't have any latest valuation on both properties.

We purchased our PPOR for $460K. When we purhased our IP on 2009, our bank ordered a full valuation on our PPOR and the value came out as $520K.

The valuation on our IP came out exactly as the purchase price which is $440K.

 

[Peter_Tersteeg]

Hi Snif,

Unfortunately we only fixed our IP loan last October. A friend told me that if our fixed rate is lower than the current variable rate, the bank will not charge us any break cost. I'm not familiar with this rule. Is this true?

No it's not true, although it has been a reasonable indicator in the past.

People are under the impression that if the fixed cost is lower than the variable there won't be any break costs because the difference in rates means the bank would be in profit. This assumes that the cost of funding a fixed loan is linked to the cost of funding a variable loan (which is not true).

The money for fixed loans comes from places like superannuation funds, other investment funds and other places. Like any commodity, these suppliers sell the money to the bank at a certain interest rate.

The bank then sells the money to you via a fixed loan. The difference between what they buy the money for and what margin the put on the money determines the interest rate you pay.

When you exit a fixed loan, in rough terms, the exit fee is based on what the bank can sell the money back to the supplier for and what you've committed to paying them, taking into account the time for the loan to run.

In the past, the variable rate was a reasonable indicator of some of these variables. The GFC messed things up and given a lot of the money we spend comes from overseas, our domestic variable rate is not neccessarily a good indicator of the cost of funds.

If you fixed in October, you might be okay as far as exit fees go, but the only way to know what the exit costs will be is to call the bank and ask for a payout figure.

 

[Joanne]

A - if it's fixed it might be to costly to break...when was this fix done?
But yes if you can un x-cross do it....it will help- Just need another valution done. From your experiecne has the value of the property gone up by at least 10%???

Hi Michael,

We fixed our IP loan last October 2010. Our PPOR loan is still variable.

The value of our PPOR increased from $460k to $520K. However this valuation was done first quarter of 2009.

I'm not sure if there is any increase in the value of our IP. We are planning to a valuation for both properties when we are close to buying the 2nd IP.

 

[Joanne]

Hi Joanne,

I've been told this by my bank (Westpac) re one of my fixed loans. The guy actually said the bank would almost pay me to break the 4.99% fixed.

I don't think it's a 'rule' per se, just means it allows the bank to make more money off you if you break a lower fixed rate to go onto their higher variable rate

Hi Mary & Mat,

Thank you for the info. We are also with Westpac. Good to know we can change to variable without any incurring break cost.

By the way, did you take Westpac offer? 4.99% is a fantastic rate. Unless there is a really good reason break it, I won't do it.

 

[mary&mat]

Hi Mary & Mat,

Thank you for the info. We are also with Westpac. Good to know we can change to variable without any incurring break cost.

By the way, did you take Westpac offer? 4.99% is a fantastic rate. Unless there is a really good reason break it, I won't do it.

Hi Joanne,

I enquired at a time when I was looking at changing lenders & was gettting payout figures from Westpac on all our loans (approx Nov last yr).

The 3yr fixed ends beginning of 2012 so I agree, we won't break it just yet

 

[Mick C]

Hi Joanne

If you want you can pm or email me the address and i can get a free roughly valuation done for you- it's usually 5% off from the lender's valuation price.


Regards
Michael

 

[komstak]

Hi Joanne,

I enquired at a time when I was looking at changing lenders & was gettting payout figures from Westpac on all our loans (approx Nov last yr).

The 3yr fixed ends beginning of 2012 so I agree, we won't break it just yet

Two of my loans fixed @ 4.99% will ending on November. Oh well nothing last forever.