How to decide which account to offset against in a split loan?

Hello,

I am taking a loan of $423k for a PPOR. I had finalized CUA's 3 year fixed loan at 4.84%. As it seemed to be the only loan that came with the assurance of being a fixed rate loan as well as it came with an offset account.

Although I am none the wiser, but after reading online, the general consensus seems to opt for a split loan. After discussing this with my broker and it falling back as my decision, I am going by gut and splitting my loan at 70/30 Fixed/Variable. Primarily because even if there was a lot of variance on the 30% of the loan - it will not make too much of a difference in my ability to pay my monthly mortgage/savings.

The variable loan of $127k will be charged an interest at 4.65% and will come with an offset account. The fixed part $296k will charged at 4.84% and will come with its own offset. However, I also have an option of fixing the $296k at 4.69% with no offset. Assuming I will be able to put aside at least $2k every month into my offset (apart from having my salary get deposited in there and running it as an everyday account), would you please be able to guide me on which type of fixed loan would work best for me (with the main intent of saving interest and being able to create more equity) ?

Cheers
 
I think you're over-thinking this whole thing if your goal is to create more equity.

Did you calculate how much difference this actually makes each year?
 
2k each month for 36 months is $72,000. Add in a 20k buffer for extra repayments. You have a variable loan of $127k. Therefore, by the end of the fixed rate period, you'll still be paying interest on this part of your loan (albeit, small), as well as your fixed loan.

I'd take the interest rate saving and lock in a 3 year fixed with no offset.

Cheers,
Redom
 
Hi Aussieb

Looking beyond the rate factor - what are your future plans with this property? Will you be looking to extract equity in the future?

Cheers

Jamie
 
I think you're over-thinking this whole thing if your goal is to create more equity.

Did you calculate how much difference this actually makes each year?

Yes, even I think I am over thinking this. But since the time I started reading the forum here, the peer pressure to have a goal and accumulate a few IPs is high :) so the fear of failure is what is making me ask this question now.

If I could accurately calculate the difference and savings, I wouldn't be posting here for help, aye. :) But I did some basic numbers and figured that I should take the lesser interest rate on fixed and go with the offset on the variable. Just as Redom suggests.
 
2k each month for 36 months is $72,000. Add in a 20k buffer for extra repayments. You have a variable loan of $127k. Therefore, by the end of the fixed rate period, you'll still be paying interest on this part of your loan (albeit, small), as well as your fixed loan.

I'd take the interest rate saving and lock in a 3 year fixed with no offset.

Cheers,
Redom

Thank you Redom. I had arrived at this conclusion too. But wouldn't the savings, on the term of the loan, be greater if I chose the three year fixed rate with offset ? More so, if the variable rate keeps in synch with the market sentiment and if it goes down then I'd be losing on the interest percentage. No ?
 
Hi Aussieb

Looking beyond the rate factor - what are your future plans with this property? Will you be looking to extract equity in the future?

Cheers

Jamie

Yes. I will be looking to extract equity in the future. Nothing is concrete yet, but I think in 5 years, as the family outgrows this house, this'd be an investment property. That is one of the reasons why I am not too interested in making the loan as IO as I want to be able to pay off a bit on the principle, as from what little I understand, that will play a part in the equity am able to extract. I had an inclination to make the variable loan as IO but I found me digging into the analysis paralysis hole :)
What do you reckon ?
 
Yes. I will be looking to extract equity in the future. Nothing is concrete yet, but I think in 5 years, as the family outgrows this house, this'd be an investment property.

In that case - definitely best to set it up as IO and avoid paying down any of the principal.

The rationale is that the loan will become deductible when it becomes an IP - so best to preserve the loan balance, especially if you end up purchasing another PPOR.

Also look into the lenders equity release policies before committing to a fixed loan term too.

Cheers

Jamie
 
In that case - definitely best to set it up as IO and avoid paying down any of the principal.
Hey Jamie, Thanks for your quick reply. So would it be better to setup both the fixed and variable loans as IO ? Or in my case just the variable part ?

Then, does it still make sense to opt for the lesser fixed rate interest (with no offset) ?
Also going IO does not help in creating equity, right ?
 
In this case your equity will be in your offset. I would set up both as IO, and pay all extra funds into your offset. This just gives you the best flexibility and avoids paying principal off a property that will turn into an investment.

The funds in your offset can then be used for your ne.xt PPOR
 
Thanks for your reply Jess. I spoke with my broker in the meanwhile about converting the entire loan amount as IO but he says the lenders look down upon a first home buyer to be going for an IO only given that owner occupied purchases are mostly P&I loans and to get IO on the entire loan is almost not possible. Whenever the time comes to convert the PPOR to an IO we can refinance the loan as an IO. I was able to push the broker to convert at least the Variable part as IO.

Would this structure keep me out of trouble ?

Is it true that as a FHO it is difficult to get an IO loan ?
 
Not in my experience, but IO for a PPOR might be a bit unusual for some brokers who do a lot of PPOR lending and not too much IP lending.

If you can convert later I can't see why you can't do it straight away. Ask your broker - it's worth a shot :)

What you currently have won't get you in trouble as such, but it's not the ideal if you know it will be an IP down the track.

However, if you are a bit of a spender, paying P&I can mean there's less of a temptation to spend your savings.
 
Thanks for your reply Jess. I spoke with my broker in the meanwhile about converting the entire loan amount as IO but he says the lenders look down upon a first home buyer to be going for an IO only given that owner occupied purchases are mostly P&I loans and to get IO on the entire loan is almost not possible. Whenever the time comes to convert the PPOR to an IO we can refinance the loan as an IO. I was able to push the broker to convert at least the Variable part as IO.

Would this structure keep me out of trouble ?

Is it true that as a FHO it is difficult to get an IO loan ?

Depends on your LVR - lending conditions are tightening, no doubt. IO loans on high LVR PPOR lending can be tough to get - i'm starting to see this with some of the more aggressive lenders NAB, Macquarie, etc. Just get your broker to try, but it may not be possible.

Cheers,
Redom
 
Depends on your LVR - lending conditions are tightening, no doubt. IO loans on high LVR PPOR lending can be tough to get - i'm starting to see this with some of the more aggressive lenders NAB, Macquarie, etc. Just get your broker to try, but it may not be possible.

Cheers,
Redom
Thanks for your reply Redom. LVR is at 90%
 
Thanks for your replies. I have opted for 70% of the loan on a fixed rate at 4.69% and 30% of it at 4.65% variable and made the variable as IO.
Cheers
 
Lending for IO against PPOR's is tightening - but certainly not impossible.

Your broker will just need to explain the rationale behind the structure - ie it could become an IP at some point down the track so client would like to preserve the principal balance and will make extra repayments into the offset instead.

If that won't work - look at the possibility of a switch to IO post settlement. There could be some fees involved though.

Cheers

Jamie
 
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