I am intending to move back into one of my IPs which was originally purchased as a PPOR in 2002. Currently I have 2 loans on this property, both IO, one (most of the loan) being 5r fixed the other being variable the lender being Members Equity. In requesting I convert my loan from IO to P&I they state the break cost will be $1070, is there a way I can avoid this, besides interest rates going up?
IO to P&I:Avoiding break costs
- Thread starter doozer
- Start date
doozer said:
I probably wouldnt bother breaking the loan. Take the money that you intend to put into the loan as principal repayments and put it into an ING Account or similar earning a few points of interest, when the fixed term is up, empty the account and pay it into what ever new loan you establish. Same effect as converting your loan to P&I..Run the numbers though.. you'll pay tax on the interest you earn.. Compare the interest savings you'll make with the interest you'll earn and the tax on it.
Hiya Doo
Ask if they will switch IO to a diff product, the one that has the offfset acct and pay the eqquivalent of the Principla into that acct.
ta
rolf
Ask if they will switch IO to a diff product, the one that has the offfset acct and pay the eqquivalent of the Principla into that acct.
ta
rolf
Hiya Rolf,
I have checked all alternatives with Members Equity but I wouldn't class them as flexible. However given that out of the $124500K loan, $45600 is variable IO (the remaining being IO fixed), what if I work out what P&I repayments would be both components & pay that in on to the variable figure, monitoring that I don't pay it down too quickly to incur early pay out fees. Is this feasible?
I have checked all alternatives with Members Equity but I wouldn't class them as flexible. However given that out of the $124500K loan, $45600 is variable IO (the remaining being IO fixed), what if I work out what P&I repayments would be both components & pay that in on to the variable figure, monitoring that I don't pay it down too quickly to incur early pay out fees. Is this feasible?
doozer said:
Hi Dozer
I think you a little confused.
From what you have written above I understand the new PPOR has two loans.
One being P & I and one being IO. Is that correct?
If so, you don’t need to change your loans unless the lender requires it.
Simply pay what you can, and not what you would have to into the P&I. The more the better! You are reducing your non-deductible debt and saving interest at say 6.5% post tax return which is equal to a 13% pre tax return from say ING.
This is great idea as it frees up more equity as you pay down the principle which allows you to get more investment funds is you wish by having a lower LVR (loan value ratio).
One proviso though…..
Remember once you pay down the principle should you move out of the PPOR and turn it back into a IP you cannot increase the principle again ands claim tax deductions. SO the amount you can NG is reduced.
Once the loan is repaid, the new draw/loan is only tax deductible if used for a income earning investment.
If this new PPOR is yours for a while (2+ years) this does not really matter as you get CGT exemption from when you move in to offset any gain.
Peter 147
Hi Dooz
depending on what the contract says, you may be able to fully repay the variable portion. You wont be discharging the loan - so there may be no penalty.
Ta
rolf
depending on what the contract says, you may be able to fully repay the variable portion. You wont be discharging the loan - so there may be no penalty.
Ta
rolf
Hello Peter147
Yes I agree, when in doubt, eat chocolate! Re loans- yes there are 2 loans both are IO but the larger loan is on a 5yr fixed and the remaining on a variable. From a little digging around Members Equity like most lenders will allow principal repayments on the variable portion so I'm looking for a way to self manage repayments that is simulate that the loan was a P&I one without incurring the break cost of converting from a IO to a P&I loan. I hope this makes sense.
Yes I agree, when in doubt, eat chocolate! Re loans- yes there are 2 loans both are IO but the larger loan is on a 5yr fixed and the remaining on a variable. From a little digging around Members Equity like most lenders will allow principal repayments on the variable portion so I'm looking for a way to self manage repayments that is simulate that the loan was a P&I one without incurring the break cost of converting from a IO to a P&I loan. I hope this makes sense.
doozer said:
Hi Dozer
It is all clear now.
Glad you found you could make principal payments. Most lenders allow this up an an amount PA usually $5k. Put in the $5k ASAP amd save for next $5k.
It is frustrating when lenders do not allow flexibility. This is where a Rolf Mortgage Broker type can help. I dread to think how much I have lost refinancing my portfolio as it grew!
I guess the lesson for all of us is to keep a small ( say $25k amount in P&I variable with replay as you never know when you will win some cash, get a good tax return, inherit, etc.
Peter 147
