First Home Blues

[tsunami]

Hi, a couple of days ago I signed for my first home loan at under $170,000 and the amount I requested was accepted with no hesitation even though I'm self employed. At the same time I received a letter from another bank telling me they are willing to lend me over $300,000 (with mortgage insurance if relevant) at 5.23% variable. That would mean I could buy something a lot more comfortable but I would be in much higher debt and commitment. But I don't have the time really anymore and it has taken a long time to get this home I'm buying so I decided to go ahead with this purchase.

I'm putting in around 50k including the FHOG so I don't need to pay for mortgage insurance since I have over 20% deposit.

The problem I have now is that I asked the bank to speed up my loan for various reasons and this meant I never got to really have a good read of it and I was only given the basic details in the bank as we sat down. I take full responsibility for that but I can still jump out if it was that bad as the property has not been settled yet. It still might be fine and I will be discussing all this on Monday with my bank and accountant.

So I see the loan is an Interest Only loan at 5.21 % variable. None of the documentation they gave me said it was Interest only so I'm a little concerned about this as my goal is to pay this off as quickly as possible. But I have been reading a bit on this Interest Only loan and I can see it has a few benefits which might suit my situation. My business is totally unpredictable and one month I could make double what I made the previous month and vice versa. So not having too large repayments could be ideal and I could just bank all the money to have a buffer in case my income slowed down but I will still try to pay this off in 4 years.

Some details about my situation. I'm buying a cheaper house a few hours from Sydney in a growing town with the home close to shops and facility's. I think it is a good buy and I have done my research. I plan to live in the home for the required 6 months of the FHOG and at the same time renovate and landscape it.

I would then most likely either want to rent it out or try to sell it. At around the same time I would like to buy a better home that I would plan to live in with my girlfriend.

I have just been going through some of the details of this loan and a few things I'm not sure about that I will talk to the bank about and even my accountant are:

Can I sell the home after 6 months (paying the loan off with the proceeds)?

The loan has a $900 penalty if I pay the loan off before 4 years, is this common?

Can I get the rates changed to fixed later (say in 6 months for example)?

So I see I can make extra payments without a penalty and the loan has an option of Repayment Holiday

I don't have to pay the normal $600 admin fee or stamp duty although it says I do in the docs I have to but the loan office verified this verbally.

one part that I'm a little worried about is this part:

Obligations > "No Dealings"
Not do any of the following:

(b) sell or otherwise dispose of the property

unless the Lender first gives consent.

It says the loan term is for 5 years and I think that is just for the interest only part. The loan is a Single Draw loan and I can only draw it in one installment from what the documents say but I'm not sure what this means? The loan officer said I only have to pay just over $500 a month but the documents I have don't say that, it says 5 years at 60 installments? he said no it is like that as it's an Interest Only Loan! Seems a bit confusing!

We expect to settle the home early this week after I requested to the bank and the solicitors and vendors.

I can still back out of the loan from what I understand (- fees) but the deposit has been passed to the vendor so I guess I would lose that but I don't intend to back out of it now . I might consider going to the other bank and taking up finance with them if my accountant advises it but I would rather not have to do that. I would like to use the other banks offer in say 6 months to purchase another property since their loan offer is for 12 months.

So I wold be interested to hear from experienced members on their thoughts.

 

[Rolf Latham]

Hiya

Lost of questions

In general, an IO loan is not bad for most people.

I suspect that lona can have an offset acct linked to it.

So if thats the case, pay your sapre money into that account, its like paying the home loan off, because its linked to the loan.

The 900 early exit is pretty standard amonts major lenders

ta
rolf

 

[tsunami]

Hiya

Lost of questions

In general, an IO loan is not bad for most people.

I suspect that lona can have an offset acct linked to it.

So if thats the case, pay your sapre money into that account, its like paying the home loan off, because its linked to the loan.

The 900 early exit is pretty standard amonts major lenders

ta
rolf

That has answered a couple of my questions, thanks!
I will make an inquiry about the offset account on Monday, sounds perfect but I wonder if they will give me interest on that account comparable to my investment account that I can get good interest on but still access the money anytime I like?

I'm glad to hear the early exit fee is a standard fee and I guess it's not a lot compared to the overall loan.

There is quite a few questions in my original post so I will try to put them in some order below:

• Am I actually paying more by having an IO loan?
  
  
• Can I sell the home after 6 months (paying the loan off with the proceeds)?
  
  
• Can I get the rates changed to fixed later (say in 6 months for example)?
  
  
• If the letter says I have to pay admin and stamp duty fees but the Loan officer told me verbally that these won't apply, should I be worried if it's not in writing yet?
  
  
• Why does it says under "Obligations > "No Dealings" in the Memorandum that I can't sell the property unless the Lender first gives consent?
  
  
• Would it have been a better idea (from an investment perspective) to buy a higher priced property and even just stop this current sale for the cheaper property?
  
  
• The loan officer said I only have to pay just over $500 a month but the documents I have don't say that, it says 5 years at 60 installments?
  
  
• The loan is a Single Draw loan and I can only draw it in one installment from what the documents say but I'm not sure what this means?
  
  
• What costs would I lose if I completely backed out of the Deal at this stage? I guess my deposit, bank fees, solicitors fees, plus inspection fees (already paid)? ( I don't plan to backout and it would be my last resort but just curious)

 

[travelbug]

Hi. I'm no expert but can answer a few of your questions.

* Am I actually paying more by having an IO loan?

Technically no. However, as the loan is not getting smaller you will be paying interest on the full,amount instead of an ever decreasing amount.

* Can I sell the home after 6 months (paying the loan off with the proceeds)?
Yes. But if you sell in under 6 months you will pay full Capital Gains tax .

* Can I get the rates changed to fixed later (say in 6 months for example)?
Yes, not sure if after 6 months though.. Someone else will know more.

* If the letter says I have to pay admin and stamp duty fees but the Loan officer told me verbally that these won't apply, should I be worried if it's not in writing yet?
Don't believe it unless it's in writing.

* Why does it says under "Obligations > "No Dealings" in the Memorandum that I can't sell the property unless the Lender first gives consent?

Because they own it.

* Would it have been a better idea (from an investment perspective) to buy a higher priced property and even just stop this current sale for the cheaper property?

Very debatable. Everyone has differing opinions on this one. You have to do what's right for you.

* The loan officer said I only have to pay just over $500 a month but the documents I have don't say that, it says 5 years at 60 installments?

Because it won't bee $500 a month. It may be this month but interest rates etc change all the time.

* The loan is a Single Draw loan and I can only draw it in one installment from what the documents say but I'm not sure what this means?

It means they have approved the loan but you can't pull say $50,000 out now to buy something then more later to buy something else (My thinking anyway).

* What costs would I lose if I completely backed out of the Deal at this stage? I guess my deposit, bank fees, solicitors fees, plus inspection fees (already paid)? ( I don't plan to backout and it would be my last resort but just curious)
Not sure.

I wonder if they will give me interest on that account comparable to my investment account that I can get good interest on but still access the money anytime I like

The interest you save will be the interest on your loan (It just takes the amount in your offset account off the amount you are paying interest on)

Good luck. It is a bit daunting. I wish I knew about this forum years ago when I couldn't sleep at night worrying about my decisions.

 

[Bradsdad]

The benifits of using a MB.

All the questions you ask would most likely have been covered off before applying for the facility.

Without knowing what lender is involved, certain answers cannot be provided.
You would find that usually on an IO facility you can pay lump sums off the principle. As Rolf mentioned, see if there's an offset facility and park spare funds there.
the lender won't be able to give you an exact repayment amount each month as the amount of days interest in calculated on will vary from month to month. this is not just due to the different amount of days in a month but could be due to the lender charging interest up until the last business day in the month. It could mean you will have say 28 days 1 month and 32 the next followed by 30 days.

You mention a $600 fee for application/approval. If this figure is in your letter of offer and the loan officer is stating it's to be waived "verbally", I would be concerned. the fee should be removed from the letter of offer. If it's a case of you paying the fee at settlement then having it rebated, I would get this in writing before accepting/signing the letter of offer.

In regards to "paying more" on an IO facility there are 2 answers. You are pying less per month as there is no principle component in the repayments. On the other hand you will pay more interest (assuming you make no lump sum repayments or place extra funds in an offset account) over time as the loan amount isn't reducing.


Regards
Steve

 

[RumpledElf]

If you're going to sell after only 6 months be *very* sure you've done your sums.

You lose a lot in bank fees for opening *and* closing a loan, there's stamp duty, all the holding costs for 6 months (rates, reno/maintainence, interest, water, insurance etc). When you sell you lose the agent's commission and this can be fairly hefty. Then if its not your PPoR you lose a slab of the profit in capital gains tax.

Might be better to hold it longer, rent it out, whatever. But do the math first.

 

[tsunami]

Might be better to hold it longer, rent it out, whatever. But do the math first.

Yes I doubt I would have wanted to sell it in 6 months and now I most certainly won't after finding out all this. I think I will rent it out once I get another property purchased.

-----------------

hi travelbug, thanks for answering all of my questions to the best of your knowledge.

Technically no. However, as the loan is not getting smaller you will be paying interest on the full,amount instead of an ever decreasing amount.

I think this is where I'm a little worried, I'm still not fully understanding this concept. I will get back to that part at the end of this post.....

But if you sell in under 6 months you will pay full Capital Gains tax .

Yes that's good to know and I also are required to live in it anyway and not sell it for 6 months with the FHOG. This is ok as it gives me some time to save a bit for my next home and make renovations etc. I also might just hang on this home for a few years and rent it out anyway after 6 months.

* Can I get the rates changed to fixed later (say in 6 months for example)?
Yes, not sure if after 6 months though.. Someone else will know more.

I'm a little worried that interest rates might go back to how they were as I have a feeling the economy will be nearly back to normal in around a year.

Don't believe it unless it's in writing.

Yes I have it in my diary to get this sorted out on Monday. Actually I only noticed a big advert in the bank saying "No Admin Fee on New Loans" when I went into ask a few things about my loan and I pointed that out to the loan officer and he said I don't have to pay that fee then.

* Why does it says under "Obligations > "No Dealings" in the Memorandum that I can't sell the property unless the Lender first gives consent?

Because they own it.

But would a bank usually let you sell it anyway?

* The loan officer said I only have to pay just over $500 a month but the documents I have don't say that, it says 5 years at 60 installments?

Because it won't bee $500 a month. It may be this month but interest rates etc change all the time.

Yes I realize it will fluctuate but what I mean is for 60 installments over 5 years that works out to thousands per month not hundreds?

-------------------------
hi Steve, thanks for the feedback...

Without knowing what lender is involved, certain answers cannot be provided.

The bank is Westpac

the lender won't be able to give you an exact repayment amount each month as the amount of days interest in calculated on will vary from month to month

yes I completely understand that, as i wrote in reply to travelbug the 60 installment thing is confusing at it seems to say I would be required to pay several thousand a month and not $500+ like the loan officer said.

... If it's a case of you paying the fee at settlement then having it rebated, I would get this in writing before accepting/signing the letter of offer.

Yes I'm glad I asked about this as the loan officer seemed to say I had nothing to worry about.

In regards to "paying more" on an IO facility there are 2 answers. You are pying less per month as there is no principle component in the repayments. On the other hand you will pay more interest (assuming you make no lump sum repayments or place extra funds in an offset account) over time as the loan amount isn't reducing.

I'm still a bit confused on this. Ok let's say the loan amount is $120,000. I would also have to pay interest at 5.21%.

I want to pay the loan off completely in 4 years exactly (which means I don't have to pay the early exit fee).

In this example I would make voluntary repayments at $2,000 per month (even though I'm only required to pay just over $500 approx) and say I also add another $2,000 per month into an offset account. In 4 years I would pay the remainder of the loan off completely with the money in the Offset account.

In the above example how would this overall total I pay compare to if I had a normal loan where I paid it off in 4 years? How much extra or less would I be paying in the end with the IO loan? I don't expect exact figures but just an estimate would be nice.

 

[tsunami]

I'm still a bit confused on this. Ok let's say the loan amount is $120,000. I would also have to pay interest at 5.21%.

I want to pay the loan off completely in 4 years exactly (which means I don't have to pay the early exit fee).

In this example I would make voluntary repayments at $2,000 per month (even though I'm only required to pay just over $500 approx) and say I also add another $2,000 per month into an offset account. In 4 years I would pay the remainder of the loan off completely with the money in the Offset account.

In the above example how would this overall total I pay compare to if I had a normal loan where I paid it off in 4 years? How much extra or less would I be paying in the end with the IO loan? I don't expect exact figures but just an estimate would be nice.

I know there is quite a few questions but this one above is really important and I would appreciate it if someone can please answer this as I have to discuss this with the bank tommorrow. I also realise that interest rates will change over 4 years so I'm just hoping for some type of estimate comparison on a IO loan compared to a normal home loan.

 

[Bradsdad]

confused at the panic as your bank could answer this in a few touches of the keyboard.

$2775 p/m P & I would see the job done in 4 at the quoted rate.

 

[travelbug]

The amount would be the same.

If you took it off the loan or had it in the offset account you are paying interest on the same amount.
The difference is that if it's in the offset account you can access the money if you need it.
Also if you are renting it out you have the tax benefits of deducting the full amount of the loan. If you pay the loan down the rent may be higher than the interest therefore you will pay tax on that.

You need to decide what your plan is. Live in it for 4 years and sell or rent it out then sell. What if you decide to keep it? Make the decision based on what your plan is.
If you are going to turn it into an IP go for the IO.

 

[tsunami]

$2775 p/m P & I would see the job done in 4 at the quoted rate

Yes I wasn't sure if they are both the same for the two loans. thanks for posting this info.

The amount would be the same.

well that is what I thought and hoped, so thanks for confirming that.

Also if you are renting it out you have the tax benefits of deducting the full amount of the loan. If you pay the loan down the rent may be higher than the interest therefore you will pay tax on that.

that's interesting for the tax part, I will study all that over the following months.

You need to decide what your plan is. Live in it for 4 years and sell or rent it out then sell. What if you decide to keep it? Make the decision based on what your plan is.
If you are going to turn it into an IP go for the IO.

Yes it will be an IP but it will first be my PPOR for about 6 months - 1 year. I will then rent it out when I'm able to buy another home which will be my new and more permanent PPOR.

I do have to probably look at making some longer term goals but I have a first year goal of owning 3 properties, by the end of this year.

 

[tsunami]

One more thing.... wouldn't it be more profitable to only keep a few thousand in the offset account and put the money I make that I would have put in the offset account into a bank account that earns interest like the Westpac maxi saver? This account earns interest but you can also access it and take money out of it anytime. Then in 4 years when I planned to pay the loan off I would take the savings from my investment account and pay it off completely?

 

[investor888]

tsunami, your offset account is "earning" a lot better interest then you will get with any online savings account.
Your 100% offset account is offset against your home loan. If your home loan has a rate of say 5.5%, every dollar in your offset is saving you interest.
Also, if you have money in a savings account. Not only will you not get an interest as high as 5.5%, but you also then pay tax on the interest earned.
Your offset account is just like any other bank account. You can have pay going into it, pay bills from it, etc.
If you have $10000 sitting in Westpac maxi saver at 3%, then you earn 300 interest. Against your homeloan of 5.5%, it saves you >$550 in interest in a year.

 

[tsunami]

tsunami, your offset account is "earning" a lot better interest then you will get with any online savings account.
Your 100% offset account is offset against your home loan. If your home loan has a rate of say 5.5%, every dollar in your offset is saving you interest.
Also, if you have money in a savings account. Not only will you not get an interest as high as 5.5%, but you also then pay tax on the interest earned.
Your offset account is just like any other bank account. You can have pay going into it, pay bills from it, etc.
If you have $10000 sitting in Westpac maxi saver at 3%, then you earn 300 interest. Against your homeloan of 5.5%, it saves you >$550 in interest in a year.

Excellent, well that makes perfect sense now. So now I just hope my bank are going to provide an offset account with this loan which I will find out Monday morning...

 

[tsunami]

It looks like my loan doesn't allow for an offset account. I just checked it out online here at westpac and found it says "100% Offset This option is not available on this loan.

I'm a bit worried now but will see what they say about this in the morning....

 

[travelbug]

I do have to probably look at making some longer term goals but I have a first year goal of owning 3 properties, by the end of this year.

I want to pay the loan off completely in 4 years exactly (which means I don't have to pay the early exit fee).

You sound very confused.

You want to pay off the loan in 4 years AND you want to buy 3 properties in one year. If you are putting all your money into paying off the loan where will the money come from to buy the 3 other properties?


You must earn some huge money.

 

[tsunami]

You sound very confused.

You want to pay off the loan in 4 years AND you want to buy 3 properties in one year. If you are putting all your money into paying off the loan where will the money come from to buy the 3 other properties?


You must earn some huge money.

Sorry,I worded that wrong unless I have a huge next 8 months

i meant my goal for this year is to have 3 properties in my portfolio and I expect to be still paying a loan off on all of them.

 

[Rolf Latham]

Simply change to the Rocket Repay product which has the offset

Sounds to me like the person that sold the product did ZERO digging to see what your actual needs might be.

The person must have made lots of assumptions which is stupid at best, malpractice at worst.............but unfortunately common practice

ta
rolf

 

[tsunami]

Simply change to the Rocket Repay product which has the offset

Sounds to me like the person that sold the product did ZERO digging to see what your actual needs might be.

The person must have made lots of assumptions which is stupid at best, malpractice at worst.............but unfortunately common practice

ta
rolf

The original loan officer is away on a vacation so have had to go through his associate. I contacted them yesterday about it and asked about the offset account and he said they would get back to me but they said it shouldn't be a problem but we had another more important issue to deal with first. Today I was told that I can't have an offset account with that loan but I could have another account to pay my loan off which will reduce the principle. From my understanding the only difference is that I can't withdrawal any money out of that account. I don't get a lot of details as I was on the phone and t was a bit noisy.

I would much rather have an offset account in case I needed some of the funds. I had a look at the Rocket Repay loan and there are some differences like the Annual service fee of $199 pa and a slightly higher interest rate of 5.91% on the rocket product.

There has been some slow down with my loan due to a mistake in the FHOG so we are now waiting to get docs back to get it fixed up and I have to fill out everything again. THe problem is I need to get this going as fast as possible due to various reasons so I can't afford to slow it down any further.

I wonder if I asked them to change my loan to the Rocket Repay if it will further slow it down and would they agree to this anyway? How much better off would I be with the Rocket Repay?

I could go to the Comm Bank as I was approved for finance there as well but then they would have to valuate the home etc and that could take much longer. I'm not even sure they have better options either for my needs? Maybe I should just leave everything as it is?

 

[Rolf Latham]

Hiya

Sounds like for the moment youd be best off to settle with what you have.

I detect a fair bit of stress, and given the imminent settlement, you might be right. Leave it be and sort it out later if at all possible.

A product swap into RRHL should be possible after settlement, by which time u will have a clearer understanding of if such a product will be more suitable for you

ta
rolf