PPOR to future IP

[Joga]

Hi all,

My partner and I are in need of some advice in regards to restructuring our home loans. We purchased our PPOR just over 1 year ago and were planning on purchasing another property in a couple of years.

Our current loan structure is as follows

Fixed Loan Amount 218k expires in April 2015
Variable Loan amount P&I 78K
100% full offset account 81k

We have been talking about buying a new property in a couple of years that will become our PPOR and our existing property will be turned into an IP. My main concern is making sure my current loan structure supports our plan.

A few questions I needed help with were, once the fixed portion of our home loan is up is it easy to consolidate the two loans into one variable loan? or will we forever have two separate variable loans? Should we look at switching the variable loan from I&P to IO now, knowing that we want to turn our current PPOR into an IP later on, or should we wait?

We're also a bit concerned because we have extra funds in our offset account that aren't being used to offset our variable loan and will continue to grow until April 2015. I was thinking of taking that money and putting it into a high interest savings account until then as nothing over 78k will be offsetting the variable portion of our home loan. I really regret fixing such a high amount of our loan now.

We would really appreciate your thoughts on the above points...

Cheers

 

[Terry_w]

Yes, what you said makes sense. Excess money in an offset account is not earning income - so better to put it elsewhere. Changing to IO now will mean less non deductible debt in the future.

One loan or two doesn't matter in the end, but you could consolidate.

Sounds like you could afford the IP now - just do it without using any cash, set up a LOC on the current house for the depost. Set it up as IO with anothr offset - park the excess funds here for now. Once you move in move all cash over to that offset.

 

[ozmale42]

I just went through something similar. Our IP becoming a PPOR and our previous PPOR becoming an IP.

We had never used the offset on the IP before as it made no sense. However when it becomes a PPOR all our offset funds (which are currently offsettting our current PPOR) will be moved to the offset account which has linked to it one of the loans for this new PPOR.

Problem i noticed yesterday was that the loan linked to the offset only had a balance of $80k. However our offset funds will be $300k. Seems that when one of the fixed loans on the property matured in April this year (and became variable) it was not added to the existing $80k. Hence, prima facie, I would get no benefit from the surplus $220k of funds sitting in the offset.

Phoned Westpac to explain the problem and they were happy to combine the 2 variable loans into one accouint. Problem solved.

 

[Chris B]

Hi all,

My partner and I are in need of some advice in regards to restructuring our home loans. We purchased our PPOR just over 1 year ago and were planning on purchasing another property in a couple of years.

Our current loan structure is as follows

Fixed Loan Amount 218k expires in April 2015
Variable Loan amount P&I 78K
100% full offset account 81k

We have been talking about buying a new property in a couple of years that will become our PPOR and our existing property will be turned into an IP. My main concern is making sure my current loan structure supports our plan.

A few questions I needed help with were, once the fixed portion of our home loan is up is it easy to consolidate the two loans into one variable loan? or will we forever have two separate variable loans? Should we look at switching the variable loan from I&P to IO now, knowing that we want to turn our current PPOR into an IP later on, or should we wait?

We're also a bit concerned because we have extra funds in our offset account that aren't being used to offset our variable loan and will continue to grow until April 2015. I was thinking of taking that money and putting it into a high interest savings account until then as nothing over 78k will be offsetting the variable portion of our home loan. I really regret fixing such a high amount of our loan now.

We would really appreciate your thoughts on the above points...

Cheers

Joga,

Yes, definitely transfer the surplus funds into a savings account. My wife and I just did the same prior to purchasing. We used ING which has an introductory rate of 4.35% for the first 4 months. By opening individual accounts 4 months apart, you can get this rate for the next 8 months (provided it is still being offered in 4 mths).

Have you checked if you are allowed to make additional repayments on your fixed loan without penalty? Many lenders will allow $10k-$20k per year. Also, what is your fixed rate? As you only purchased about a year ago, you are probably on a similar rate to the current variable and there may not be much of a penalty (or none at all).

Yes, your variable loan should be on interest only.

Kind regards,

 

[Joga]

Joga,

Yes, definitely transfer the surplus funds into a savings account. My wife and I just did the same prior to purchasing. We used ING which has an introductory rate of 4.35% for the first 4 months. By opening individual accounts 4 months apart, you can get this rate for the next 8 months (provided it is still being offered in 4 mths).

Have you checked if you are allowed to make additional repayments on your fixed loan without penalty? Many lenders will allow $10k-$20k per year. Also, what is your fixed rate? As you only purchased about a year ago, you are probably on a similar rate to the current variable and there may not be much of a penalty (or none at all).

Yes, your variable loan should be on interest only.

Kind regards,

Thanks for the feedback guys. Chris I didn't realise that ING had such a competitive introductory rate, I think I've gotten so use to UBank having the better rate I didn't really shop around this time. As I already have savings accounts with ING and UBank I just decided to transfer the extra funds back into my old USaver account, earning 4.01% (includes a bonus 0.70%). I didn't like how the ING rate reverts back to 3.25% (includes the 0.50% bonus) after the four months expire.

With contributing to my fixed loan, it is possible for us to contribute up to $10,000 to our fixed loan in a financial year. However, I thought why should I contribute extra and pay the loan down when the fixed interest is going to be the same each month regardless of how much principal I pay down? I might as well be earning interest on it until my fixed loan expires and then dump my savings into my offset account once my two loans are consolidated. Does this sound like a good idea?

Just another question with IO on my variable loan.. Because my offset account is fully offsetting my variable loan will the bank even let me go IO on my variable loan as I'm currently paying no interest each month? I'm not sure if I should even bother with switching to IO at this point or wait until my current PPOR is an IP. What do you guys think? My fixed rate is 4.99%.

 

[Terry_w]

Paying $10k off a fixed loan will save you interest because interest is still calculated on the daily balancce of the loan. It is only the interest that is fixed.

Are you both on the same income? A savings account in the name of a non working spouse may save you money.

Also is the propert going to become an investment property in the future? If so paying down the loan may not be a good idea.

 

[Chris B]

Thanks for the feedback guys. Chris I didn't realise that ING had such a competitive introductory rate, I think I've gotten so use to UBank having the better rate I didn't really shop around this time. As I already have savings accounts with ING and UBank I just decided to transfer the extra funds back into my old USaver account, earning 4.01% (includes a bonus 0.70%). I didn't like how the ING rate reverts back to 3.25% (includes the 0.50% bonus) after the four months expire.

With contributing to my fixed loan, it is possible for us to contribute up to $10,000 to our fixed loan in a financial year. However, I thought why should I contribute extra and pay the loan down when the fixed interest is going to be the same each month regardless of how much principal I pay down? I might as well be earning interest on it until my fixed loan expires and then dump my savings into my offset account once my two loans are consolidated. Does this sound like a good idea?

Just another question with IO on my variable loan.. Because my offset account is fully offsetting my variable loan will the bank even let me go IO on my variable loan as I'm currently paying no interest each month? I'm not sure if I should even bother with switching to IO at this point or wait until my current PPOR is an IP. What do you guys think? My fixed rate is 4.99%.

Unfortunately the ING rate is just a promotion to get new customers but it is better than nothing.

There probably wouldn't be a penalty for breaking your fixed rate as there shouldn't be a financial loss to the lender. If you are planning to turn your PPOR into an IP, you would probably be better off refinancing to make it all IO with offset against the total balance. It's hard to know without all the figures but you won't get a better savings rate than putting your additional money into an offset.

 

[Joga]

Paying $10k off a fixed loan will save you interest because interest is still calculated on the daily balancce of the loan. It is only the interest that is fixed.

Are you both on the same income? A savings account in the name of a non working spouse may save you money.

Also is the propert going to become an investment property in the future? If so paying down the loan may not be a good idea.

For some reason I thought the interest paid on my fixed home loan was fixed each month. I thought it was calculated on the entire amount that was initially fixed at the commencement of my loan, regardless of how much you pay off. Thanks for clearing that one up.

My partner and I do intend on making our current PPOR an IP in the near future. I just want to ensure I have structured my loan/s in the best possible way for when we decided to convert it.

I guess I will speak to my lender about my fixed home loan.

One last thing, if I end up structuring my loan so it is a variable home loan, IO and a 100% offset account attached, how long do lenders allow you to have a home loan as IO as opposed to I and P? 5, 10, 30 years?

Also, what happens when you have a 400K mortgage, 400K sitting in your offset account and the bank turns around and says your IO period has expired and we are switching you to I and P? Does this happen? Will your 400k in your offset account just decrease slowly to 0 as it moves into your home loan account each month leaving you a cash balance of 0?

 

[Terry_w]

One last thing, if I end up structuring my loan so it is a variable home loan, IO and a 100% offset account attached, how long do lenders allow you to have a home loan as IO as opposed to I and P? 5, 10, 30 years?

Also, what happens when you have a 400K mortgage, 400K sitting in your offset account and the bank turns around and says your IO period has expired and we are switching you to I and P? Does this happen? Will your 400k in your offset account just decrease slowly to 0 as it moves into your home loan account each month leaving you a cash balance of 0?

generally 5 years IO though some lenders allow 10 years or even 15 years.

Once this expires the loan will revert to PI, unless you extend the IO period.

If you take a IO loan with a 100% offset there will be no interest chargeable if the offset amount equals the loan balance. but when it changes to PI they will generally take a monthly payment so the loan can be paid off in the remaining time. e.g you have a 30 year loan with a 10 year IO period than will mean from year 11 onwards it will be PI over 20 years. Payment will reflect this. However if you have the money in the offset account still the whole repayment will be coming off the principal each month. It would pay itself off in rapid time. but you could periodically ask the bank to reduce the repayments as the loan balance drops.

 

[serendip]

For some reason I thought the interest paid on my fixed home loan was fixed each month. I thought it was calculated on the entire amount that was initially fixed at the commencement of my loan, regardless of how much you pay off. Thanks for clearing that one up.

Some do work like this. I'm about to switch lenders because the only IO option they had was setting repayments at the full amount of the loan, regardless of the amount in the offset, effectively ensuring you're paying off some of the principal if you have anything in the offset account.

 

[Terry_w]

Some do work like this. I'm about to switch lenders because the only IO option they had was setting repayments at the full amount of the loan, regardless of the amount in the offset, effectively ensuring you're paying off some of the principal if you have anything in the offset account.

St George?

 

[serendip]

St George?

Newcastle Permanent

 

[lup15]

So after the IO period is over, do people normally refinance to go on another IO period?

 

[Terry_w]

So after the IO period is over, do people normally refinance to go on another IO period?

If you have non deductible debt then you should always try to get IO on investment loans so you can pay off the non deductible first.

But people can't always get another IO term as many banks will want to reassess the loan and if the person is no longer working they won't qualifty.

This week I spoke to one woman who had several properties that had all rolled over to PI. She has no other income other than rent and therefore needs the cashflow, but the bank will not give her a further IO term. she is in the negative each month and can only last this way approx 12 months before she will have to sell.

All properties are with the same bank and all cross collateralised. This means when she does sell one the bank will have to reassess the situation with the other properties and beccause this is not working they will take the proceeeds of the sale to pay down the other loans. So this will not help her cashflow. She may have to sell multiple properties so all the loans are paid off to get out of this. or she could get a job - but is 65 years of age so not easy to find work.

Planning ahead could have avoided all of this.

 

[lup15]

ouch, poor lady. Hope she comes out ahead at least if the only option is to sell.

thanks for sharing Terry. Although it was another person's misfortune, we can all learn from it.

I will be in the same boat as the OP in that I plan to buy a PPOR but turn into an IP later down the track. I guess talking with the bank/broker and advising them of my plans will help alleviate these problems.