Fixed repayment amount on IO loan

PPOR, looking to quickly switch loan to IO, current institution seem to require full application including $350 fee. IO term 5 years. 100% offset is possible. If I wanted to extend IO beyond that another full application would be required.

The bit I'm most concerned about is that they set the repayment amount, effectively lowering the principal of the loan. Lets say $320K in the loan, property valued at about $450K, $50K in the offset, interest calculated on $270 but repayments set as if is was $320K. So after 5 years I would have a lower principal but also less flexibility in cash flow on the way.

Questions:
1. Have I understood that correctly?
2. Is that 'normal'?
3. Am I right in thinking that i would be better off having the repayment amount move depending on the offset balance which will also ensure I have greater flexibility in what to do with cash flow?
 
1. maybe, hard to say. Sounds plausable.
2. maybe normal for that lender, or that particular home loan person's assumptions
3. yes, if you want to continue to have access to the redraw/offset amount, then make sure the new loan is for the full blance, rather than the net balance.

Having a full application to change to I/O or fixed or even for small top ups can be an issue for many investors.

Do some research on lender policies if you are thinking of switching. When my details changed (got married, had kids, became jointly and severally liable for a PPOR debt etc) I found it dificult to refinance, and as I was with a lender who asked for a full application even to extend an interest only period, it made things dificult.

Some lenders will let you top up a loan for up to $50k without a new application, if the existing loan is in order, along with changes to I/O fixed etc etc. Its a pretty important factor for investors in my opinion.
 
The product/lender setup doesn't seem to provide you with the flexibility that you need.

You generally want interest calculated on the net debt owing, otherwise as you've guessed you'll be paying down the principal portion as you increase your funds in offset.

Are you in LMI territory/paid significant LMI already? It might be worth refinancing this loan now before going even further down the path with a lender who doesn't fit your needs.
 
There's a few lenders that structure their interest only loans in the manner that's been indicated. The requirement for re-assessment of the loan is not uncommon either. The processing fee indicates that it's probably a smaller lender or building society; the combination of the 3 factors doesn't suggest a first or second tier lender.

The biggest concern is the principal reducing payments. If it's your own home then this is not entirely bad, but it may not be optimal. Often the whole point of having interest only is to preserve cash flow, which this type of account doesn't really do very well.
 
Thanks everyone. Yes, it is a building society. I like/d the idea of supporting local but if it's not going to suit my needs well they'll be out on their ear.

At the moment it is my PPOR but the intent is to turn into IP, it's in a good area for growth and very rentable so I think I'll hang on to it rather than sell & buy a different IP, even though the loan wasn't ideally structured from the start.

Having spoken to my FA earlier today I'm going to talk to a mortgage broker, get some input on other loan options which may suit me better going forward, get a formal valuation on my current PPOR then make some decisions on which way to move forward.

The loan was initially subject to LMI but think the valuation should put me around 70% LVR now.
 
Thanks everyone. Yes, it is a building society. I like/d the idea of supporting local but if it's not going to suit my needs well they'll be out on their ear.

On the local small and friendly note........my experience with smallerlenders is this.

the smaller the lender the more voracious their debt recovery and loss teams are............ I guess they need to be ?

ta
rolf
 
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