P&I Minimum Repayments?

[TEG]

Hi,

I have two IP loans linked to an 100% offset account.

I am paying P&I on both loans.

I am VERY highly leveraged, and wanted to know how I can reduce the minimum repayments on one of my loans.

I know from a tax perspective that itś better not to pay off the investment loans (as the interest reduces and thus you get a smaller tax return).

However, I have around $20K sitting in the offset account.

Question:

If I transfer, say $10K into one of the loans, will my minimum repayments automatically decrease for that loan or will they stay the same?

Sorry if this is a newb question... i just dont want to transfer the money, and then find out that my min. repayments are the same as before. Then I would have gained nothing, as my aim is to reduced the min. repayments, so I have more cashflow.

Thanks.

 

[VIC Lender]

Options might depend on the lender. Is it a major bank or someone else?
It you can- please let us know the lender...

You could consider switching to interest only. With a major bank this would be free or a small fee.

If you pay the capital in to the loan you can have the bank recalculate your minimum repayment if they also cancel the redraw - might not be a good idea if you are tight on cash-flow.

I would firstly change to interest only and secondly consider fixing part of the debt to hedge against any future rises. Keep in mind fixing should not be to beat the bank- it should be give you comfort that you can budget with a set repayment.

You are usually better to keep a loan interest only and put surplus money in offset rather than the actual loan. This preserves the debt and gives you cash to use in the future if required for personal use (you don't want to redraw for personal use or that portion of the debt is no longer deductible).

In summary - switch to interest only, consider fixing part of the loan, and continue to use offset (to have offset you will still need some variable debt).

 

[Rolf Latham]

WHat Vic said

With a couple of add ons

1. Do u also have PPOR debt ?
2. Highly leveraged implies high LVR, doesnt nec mean stressed repayments, though I think Vic has interpreted your question properly ?
3. Some Lenders ( eg ANZ) will make you go through a FULL application to convert from PI to IO inc vals.............choose carefully.
4. Some lenders like CUA, Adelaide Bank and The Rock will provide a 100 % offset on fixed, much the same as on a variable

ta
rolf

 

[TEG]

Hi,

Lender is Suncorp Bank.

I wanted IO from the start for both loans, but since my LVR was very high, they would only give me the loans as P&I. I wanted to buy my 2nd IP (bought at the end of 2009), so I was happy to go P&I initially.

I already enquired about switching to IO. There is a $300 (or $600 , can remember now) fee per loan to change from P&I to IO, and also I have to have a written letter explaining my reasons for wanting to change.

I think I will go ahead and switch to IO for both loans.

I am leaning to keeping my funds in the offset, as I have easy access to the funds for everyday use and emergency fund. However, the cashflow is a bit tight at the moment.

Thanks for the suggestions about fixing part of the debt. I will look into this.

Thanks.

 

[Rolf Latham]

hmmmmmmmmmmmm

The illogical lenders rear their head again

Sir................We believe your income is not sufficient to service the IO debt.

Sooooo

What we can do is we can give you the loans, BUT only on PI

something tells me this will change when the NCCP is implemented with lenders, though I suspect all we will see is a change in the language used, but not the attitude.

Had one client this week that could not afford IO............so they suggested advnaced PI on 10 % of the loan at an extra 1200 a month

Sorry for the Rant and derail of post TEG................

ta
rolf

 

[TEG]

WHat Vic said

1. Do u also have PPOR debt ?

ta
rolf

No PPOR. living with parents and only paying small amount for board.

2. Highly leveraged implies high LVR, doesnt nec mean stressed repayments, though I think Vic has interpreted your question properly ?

Correct. I have high LVR. I dont have stressed repayments, as there is $20K in the offset and repayments automatically come out of the offset..However, my real concern is that I want to move out of home (possibly next year)..but I dont think I can afford to move out of home. The negative cashflow from the two IPś and renting and living expenses will be too expensive for me to survive. Hence, the reason why I want to minimise my repayments (in preparation for moving out of home to maximise my cashflow).

 

[TEG]

I guess getting a higher paying job (working on that at the moment), or a 2nd job, are my other options to increase cashflow, or minimise unnessesary expenses.

 

[D.T.]

Question:

If I transfer, say $10K into one of the loans, will my minimum repayments automatically decrease for that loan or will they stay the same?

Won't change your repayments at all but will affect the end date on the loan. Money is generally much better in an offset than in a loan.

How long have you had the loans for? Have you tried asking them if they'll put it on IO? Chances are their call centre guys won't be aware of the fact that the bank chose P&I for you

 

[TEG]

Won't change your repayments at all but will affect the end date on the loan. Money is generally much better in an offset than in a loan.

How long have you had the loans for?

Thanks dtraeger2k.
Yeh, I was kind of suspecting that was the case. In that case, you are right, the money is much better to be kept in the offset.

How long have you had the loans for? Have you tried asking them if they'll put it on IO? Chances are their call centre guys won't be aware of the fact that the bank chose P&I for you

I will change both loans to IO next week.

Thanks again everyone for the replies.

 

[VIC Lender]

Won't change your repayments at all but will affect the end date on the loan. Money is generally much better in an offset than in a loan.

Sorry to correct you dtrager2k but this is optional. If you pay an extra 10k you can call the bank to recalculate your minimum repayment. In many cases you can just cancel your direct debit and reset a new one - assuming you re-align the term original end date... Some lenders only do this if you have made a permanent reduction (cancel redraw).

I'd agree though that offset is better.