How would you restructure my friends loan/finances?

[Spades]

Hi All,

Firstly i'm trying to help out a work colleague who has 3 young children and a wife who works also.

Work colleague used aussie home loans and purchased a ppor a year ago.Loan was through BOM.

He put down 20% deposit,cashed in shares for the deposit and is paying P&I with no offset or at the very least a redraw.

I presume he would have a break fee through aussie home loans if he was to break,i presume the break fee wouldn't be that much?

Anyhow in the interim i have suggested to him to attach an offset account or at the very least a redraw until mileage is up with aussie home loans.
Get a credit card and pay out all outgoings via cc and keep in goings in offset.

His finances seem to be all over the place,with disused bank accounts and very little in savings.I've mentioned to him to keep it simple and get rid of disused accounts.I've suggested he talk to a broker to better his situation.

He has made improvements to his ppor and also has a granny flat attached to which his father or father in-law resides.He has no plans to invest but to pay off his ppor.

So i'm trying to help him out by making life easier with his financial situation.

Would it be better to break from aussie home loans and set up his loan in a better way?

I was thinking he'd be better off with an interest only loan with offset attached and a credit card for all outgoings.

Would it be worth tapping into any equity he has?

Any suggestions would be much appreciated.

Cheers Spades.

 

[Peter_Tersteeg]

Hi Spades,

I'm sorry, but it seems you've given your friend a lot of inaccurate information...

Lenders are no longer allowed to charge early repayment fees, not since about 2011. They are allowed to charge a processing fee when you exit the loan. Every lender has these, usually about $150 to $300. It doesn't matter when you exit the loan, you'll be charged this fee.

Given that he has no plans to invest, it's reasonable that he should pay principal & interest. Paying interest only can be a good strategy for property investors, but not for people who have no intention of every purchasing investment property. It's more likely to cause financial harm than good.

Putting any spare cash into an offset account or as extra payments into his redraw is a very good thing. It's far more cost effective in the long term than simply putting it into a savings account that pays almost nothing in interest.

If his Bank of Melbourne loan is variable, it has a redraw facility. It may or may not have an offset account available (their Advantage package loan does, their basic loan doesn't). If your friend is borrowing less than $250k, the basic loan (without the offset account) may be more appropriate for his needs. He can simply use the redraw facility.

I don't know if I'd advise him to use a credit card to pay all his outgoings. This depends on how well he can budget and what his credit card limit is. For some people this works well. For a lot of people this is a tactic used by shoddy 'debt reduction' companies which end up costing you money. The credit card only serves to get a lot of people into more trouble. Given your friend doesn't appear to managing his money well, a credit card would likely be a disaster.

If he has no intention of investing, why would he want to tap equity? This only gets him into more debt.

There's a high probability the Aussie broker has done a reasonable job to meet your friends needs.

 

[Terry_w]

Why do you think he needs a restructure?

PI is probably the way to go for him. Sound like he is not good with money so having IO may not work. Having an offset may be good if he has a bit of cash laying around - but he might be more tempted to spend this cash.

What is his rate? Break fees were banned around 2009 I think so it would be cheap for him to move banks if he wanted a cheaper rate, but the structure of the loan is probably good.

 

[Spades]

G'Morn Terry_w & PT_Bear,

Thanks for your prompt responses

@ PT_Bear,he originally had a 10k credit card but paid it off,so at present he has no credit card.

@Terry_w,structure is probably the wrong word but needs his finances sorted.
Him and his wife are able to save but having disused accounts etc is a bit messy.

I've suggested to him PI with offset attached.I also suggested say a 2k credit card for all outgoings and pay before the interest kicks in.

I mentioned interest only loan as he might want to invest later down the track.Going interest only would make life easier and excess funds can be put into offset.

@Terr_w not sure on the rate nor if he has a basic loan setup etc.

Again thanks for your reply guys,food for thought.

Cheers Spades.

 

[Jamie M]

Hi Spades

P&I is fine if there's no intention for the property to become an IP in the future.

It can be a good way of forced savings.

Cheers

Jamie