Refinancing after one year

[D_One]

Hi Somersoft,

I just bought a house and looking to settle in a few weeks.

I am signing up to the commonwealth bank's introductory guarantee of 6.14% for the first year as it also has a full 100% offset account with the wealth package unlike the fixed rate.

I am determined to have an offset account as I am hoping that we would turn this property into an investment property next year or 2 years max.

The only problem is, after 12months, the honeymoon period, the bank reduces the discount on the standard variable to 0.4%, instead of the 0.6% we would be getting if we have signed up for the standard variable in the first place with wealth package.

The reason I am thinking of refinancing is, I think many other banks and small lenders out there provide a better variable rate than the commonwealth.

What do you experts think? Is it possible to refinance with a different lender after only 12months? Also, as we may be looking to buy another small place next year and after hopefully saving 10%deposit between now and then, is it possible to borrow new lending and refinance existing at the same time?

Thanks in advance.

 

[Peter_Tersteeg]

Figure out how much you actually save on the lower honeymoon rate for that 1st year.

Dispite getting rid of early repayment fees, it still costs money to refinance. If it's going to save you less than about $1,000 you're probably better off avoiding a honeymoon loan.

If you refinance, you can expect the following costs (rough figures):
Mortgage deregistration & mortgage registration = $200
Mortgage discharge = $160 (could be a lot more)
Application fees (could be $0 to $800)

If your current LVR is above 80% you will have to pay LMI. If this is the case, refinancing is almost certainly going to cost substantially more money than you'd save.

Also I'd suggest that the CBA doesn't have a particulary good offset account. It's actually one of the worst in the industry.

 

[Rolf Latham]

What Pete Said

I will add, one risk thats not obvious to you is that the property u are buying could be worth x % less in a years time. We hope not, but needs to be considered.

In addition, Im assuming you have paid a 10 % deposit, think outside of the obvious here, something your bankie didnt cover with you Im sure


1. If you refi out to another lender at 80 % lvr, you will burn the LMI premium. Not only is that X $ lost, you lose the the opportunity cost of gearing off that lmi premium in the future.

What I mean by that is, u can pay a small top up premium to access the equity growth in the future, for future property investments. Assuming your investment work for you and increase in value what is that actually worth to you in 10 or 20 years time ?

2. Do your cashflow analysis for a sanity check..............if you do turn the place into an IP in year x, and you tip in another 10 % tax paid dollars, what happens to your cashflow numbers in the "middle game" when you buy a PPOR. What is the LONG term impact of that 10 % decision, indeed what is the long term impact of the honeymoon rate savings vs the long term cost of the decision


3. Why are you exposing yourself to Comm in the first place, especially when you know you want to be somewhere else in 13 mths time ? Not having a go, just trying to put my MB hat away, and put on my psych hat ?


ta
rolf

Hi Somersoft,

I just bought a house and looking to settle in a few weeks.

I am signing up to the commonwealth bank's introductory guarantee of 6.14% for the first year as it also has a full 100% offset account with the wealth package unlike the fixed rate.

I am determined to have an offset account as I am hoping that we would turn this property into an investment property next year or 2 years max.

The only problem is, after 12months, the honeymoon period, the bank reduces the discount on the standard variable to 0.4%, instead of the 0.6% we would be getting if we have signed up for the standard variable in the first place with wealth package.

The reason I am thinking of refinancing is, I think many other banks and small lenders out there provide a better variable rate than the commonwealth.

What do you experts think? Is it possible to refinance with a different lender after only 12months? Also, as we may be looking to buy another small place next year and after hopefully saving 10%deposit between now and then, is it possible to borrow new lending and refinance existing at the same time?

Thanks in advance.

 

[D_One]

Thanks for the reply guys.

I went with CommBank at first because I bank with them, so I thought I would keep my investment, normal bankin and home loan with them and being a first home buyer, I didn't want to risk some random bank tarnishing my credit score with unnecessary credit checks.

By going the honeymoon rate, I will save myself just over $1200. But as Pete said, the offset account on CommBank is not that great, actually terrible on the fixed rate as you only get 1.5%.

I was thinking though, when the PPOR is turned into an investment property, assuming staying with CommBank, will they do a new loan for the property as an investment property loan or do they rollover my existing loan?

What do you guys think I should do in my situation?

 

[Jake D]

Also I'd suggest that the CBA doesn't have a particulary good offset account. It's actually one of the worst in the industry.

Hi PT. I'm stuck with CBA for the time being and am curious what makes their offset so bad. I assume you're talking about MISA?
D_One notes that it is only 1.5% against fixed rate loans but it is 100% against variable. (Which is also what the conversation was originally about, right?)
I'm aware there is a minimum transaction of $500 in or out, which could be quite tedious as you'd have to make two transactions if you wanted to deal with smaller amounts, but apart from that I don't see any other negatives.



Side note to Rolf, If you remember my emails I thought I'd let you know that I'm going to wait a few months, squirrel away a few more dollars and will probably end up staying with commonwealth for the time being and pay LMI through them to remove the guarantee. Again, many thanks for your help. When the time comes that I do need a broker I hope you don't mind me calling you.

 

[Peter_Tersteeg]

I think you should start with the end in mind. If you're buying now and again in 12 months time, look for a lender and product mix that will accomidate this well.

Given your plans for the next 12 months (save a new deposit), an offset account will be really useful. Even on fully variable the CBA offset account is bad.

Due to the LMI consideration, don't even think of refinancing in 12 months if you don't already have a 20%+ deposit. It cost you a fortune in new LMI premiums to refinance. If you don't refinance, any savings on the honeymoon rate will be quickly erroded in the future (especially when you purchase the new property and only get a 0.6% discount instead of a 0.9% discount that might be possible elsewhere).


Many banks rely on the fact you'll use them simply because you've always banked with them. That doesn't mean that they're the best match for your home loan. Banks tend to treat new customers better than they treat their existing ones.

I agree you don't want to trash your credit score by shopping around. You've asked for advice from the brokers here, so why wouldn't you use a broker to implement that advice?

 

[Peter_Tersteeg]

Hi PT. I'm stuck with CBA for the time being and am curious what makes their offset so bad. I assume you're talking about MISA?
D_One notes that it is only 1.5% against fixed rate loans but it is 100% against variable. (Which is also what the conversation was originally about, right?)
I'm aware there is a minimum transaction of $500 in or out, which could be quite tedious as you'd have to make two transactions if you wanted to deal with smaller amounts, but apart from that I don't see any other negatives.

You've indicated that a drawback is that it's not a transactional account (unlike almost every other mainstream bank). The MISA account misses out on potential benefits of offsetting your entire salary against your mortgage. The CBA solution is to have a line of credit for this purpose, but that's definitely not the same thing as a transactional offset account.

The way it's 'attached' to the loan also makes me nervous about how it could be treated for deductablility purposes. In my mind it's unclear if it's truely a separate account which could bring the use of funds into question when withdrawing money. It's kind of half way between an offset account and a redraw facility.

The 1.5% against fixed rates is a non issue. You'd be better off to put your money into a term deposit than use an offset against a fixed rate with almost any lender.

There are circumstances where the MISA account structure works to peoples advantage, but this can be replicated with almost any other lender.

The MISA account is better than nothing and for many it's quite suitable. For an investor with a good savings discipline, who wants to turn a PPOR into an IP in the future, there's a lot better solutions available elsewhere.

 

[Rolf Latham]

The way it's 'attached' to the loan also makes me nervous about how it could be treated for deductablility purposes. In my mind it's unclear if it's truely a separate account which could bring the use of funds into question when withdrawing money. It's kind of half way between an offset account and a redraw facility.

Hiya Pete

I have a couple of em personally, and a little yucky sure, but not the be all and end all. Id rather have this product than a lot of the "repayment offsets" out there, or the St Geoge PPOR dog.

Cons

Cant use as daily transact account
Min opening balance of 1000

Pros
Cant use as daily transact account


It is a separate facility to the extent it has a different BSB number, and for deductability purposes its fine. It is in fact no diff than ANZ WBC etc

ta
rolf

 

[Rolf Latham]

.

By going the honeymoon rate, I will save myself just over $1200. But as Pete said, the offset account on CommBank is not that great, actually terrible on the fixed rate as you only get 1.5%.

Understand your reasoning, often if we are honest with ourselves ( inc me) most of the time we prefer to do whats convenient and comfortable, rather than whats right.............and we all know where that gets us

Clearly in your case, the product could even be labelled "unsuitable" under NCCP resg with your stated objectives


k, so u will save 1200 ...............whats the long term cost of this saving to you ?

ta
rolf

 

[D_One]

I agree you don't want to trash your credit score by shopping around. You've asked for advice from the brokers here, so why wouldn't you use a broker to implement that advice?

That is what I should have done, but I didn't and it is a little late now, since settlement is in about 3 weeks. I got roped in by walking into the bank and asking them, how much I could borrow, which they said, hey, why don't we do a pre-approval for you (Which sucked me in).

If you don't refinance, any savings on the honeymoon rate will be quickly erroded in the future (especially when you purchase the new property and only get a 0.6% discount instead of a 0.9% discount that might be possible elsewhere).

As I am only borrowing $275K, commbank discount on the standard variable is 0.6% (Although the bank lady said she can find out whether credit can offer more discount - Which i think she is just trying to get me to sign and then come back saying credit cannot offer more). But by taking the honeymoon period, discount will then go to 0.4% after this period.

My options are:
My calculations taking today's rates, assuming I turn the property into IP before Year 3 (Ideally in Year 2) and staying with commbank to avoid LMI on refinance elsewhere.

Option 1.
Year one - 6.14
Year two - 7.01
Average Interest = 6.575% (Which is still better than what commbank is currently offering me, and I would have had money saved in offset, which will reduce the effective interest as well, compared to having higher interest at the start of the loan when there is more in principal.)

Option 2.
Year one - 6.14%
Year two - 6.71% (No frills, but losing offset eligibility)

Option 3.
Year one and 2 - SVR with 0.6% discount = 6.71%

Option 4.
Year one - 6.14%
Year two - 6.14% (Fixed but with only 1.5% Offset - But assuming i can then switch to SVR with full discount after.)

So many options and it's driving me crazy. Which options do you guys reckon is better for my plans.

 

[Jake D]

Thanks for that. I had assumed that since my weekly paycheck was more than $500 I could have it directly deposited in there if i wanted to, it'd then be painful when I tried to spend money (but that's what rewards credit cards and 55 days interest free is for)

I actually haven't got one set up yet. Despite planning to for a while (forms all signed and ready to drop at the bank) and the advice I received here a few months ago.

As I said, I'm stuck with CBA for this loan for the time being, so using MISA will still be better than nothing.

 

[Rolf Latham]

Thanks for that. I had assumed that since my weekly paycheck was more than $500 I could have it directly deposited in there if i wanted to, it'd then be painful when I tried to spend money (but that's what rewards credit cards and 55 days interest free is for)

I actually haven't got one set up yet. Despite planning to for a while (forms all signed and ready to drop at the bank) and the advice I received here a few months ago.

As I said, I'm stuck with CBA for this loan for the time being, so using MISA will still be better than nothing.

thats what net bank is for : )

u get paid today, so move the money today : )

the net $ effect of not being able to immediate salary credit is in real terms isn t big

t
arolf

 

[jrc77]

I'm with CBA and have a MISA (actually a couple). IMHO it's usable but clunky.

My issues:

Limit of $500 withdrawal - however you can transfer $500 to your savings account then transfer $499 back if you want.

Transfers out of the MISA lose the description and have no account information for the withdrawal - all appear as "MISA Withdrawal Netbank". So your transfer to buy a new boat to Boats'R'Us has the same description as your transfer of your IP deposit to solicitors trust account.

Can't use a direct debit account for bills etc. Ideally my offset account would have all salary go into it and bills out of it. With MISA I need to maintain a separate account with a pool of funds in it to cover all bills.

Can't use BPay from MISA - have to transfer money to other account and BPay from there. Painful if you like scheduling bills to be paid later (just before due date).

Regards,

Jason

 

[Rolf Latham]

I'm with CBA and have a MISA (actually a couple). IMHO it's usable but clunky.

My issues:

Limit of $500 withdrawal - however you can transfer $500 to your savings account then transfer $499 back if you want.

Transfers out of the MISA lose the description and have no account information for the withdrawal - all appear as "MISA Withdrawal Netbank". So your transfer to buy a new boat to Boats'R'Us has the same description as your transfer of your IP deposit to solicitors trust account.

Can't use a direct debit account for bills etc. Ideally my offset account would have all salary go into it and bills out of it. With MISA I need to maintain a separate account with a pool of funds in it to cover all bills.

Regards,

Jason

see, useable but clunky it aint no BMW or Benz thats for sure.

My fave product suite is WBC Rocket with Offset.

ta
rolf

 

[Aaron_C]

Unfortunately you only have 3 weeks left till settlement so I would go for the option that costs you the least in the short-medium term.

We don't really know your situation but generally speaking Honeymoon rates are never a good outcome for the borrower. You don't have much of a choice at this stage but if I were you I would just take the honeymoon rate and look to refinance in 2-3 years time when you are in a better position to take your business elsewhere. Hopefully paying 7% rather than 6.50% doesn't kill you but if it does you really have to reconsider why you are borrowing money in the first place - but I think most people tend to sharpen up their saving skills once they have a mortgage to pay.

 

[Peter_Tersteeg]

My best advice at this late stage would be to go back to the CBA and ask them to change the product to the standard variable under their Wealth package. Forget the honeymoon product. This can easily be done within a few days if your loan has already been approved.

 

[D_One]

My best advice at this late stage would be to go back to the CBA and ask them to change the product to the standard variable under their Wealth package. Forget the honeymoon product. This can easily be done within a few days if your loan has already been approved.

I just told the bank lady to do exactly what you mentioned. Like what you and Rolf have mentioned, it is better to look at the end game rather than the initial savings.

As I was just adviced to by CommBank, even if I try to be sneaky by changing to a Fixed for a year then let that mature into a standard variable, the discount will still only be 0.4%.

So, I'll sign up to the SVR with the wealth package and ask the bank to increase the discount under the wealth package to match other lenders (Hopefully, they agree).

To anyone else that may come across this thread in the future, always use a broker, they know heaps more than you do.

 

[Peter_Tersteeg]

So, I'll sign up to the SVR with the wealth package and ask the bank to increase the discount under the wealth package to match other lenders (Hopefully, they agree).

Tell them you've spoken to a Victorian broker offering Bank of Melbourne with a 0.85% discount for loans over $250k regardless of LVR.

I'm not saying I like BOM over CBA (much better service with CBA), but it's a genuine current offer that the CBA may be willing to match.

 

[Aaron_C]

To be honest paying a bit more in year 2-3 if you know you're going to refinance in that time is no big deal. Just make sure that settlement proceeds smoothly because it never does even at the best of times.

 

[D_One]

Tell them you've spoken to a Victorian broker offering Bank of Melbourne with a 0.85% discount for loans over $250k regardless of LVR.

I'm not saying I like BOM over CBA (much better service with CBA), but it's a genuine current offer that the CBA may be willing to match.

Thanks Pete,

I followed your advice, gave them a bit of a push and they gave me an extra 0.15% discount to bring the interest on SVR with discount to 6.26% after Wednesday's cut.

I now have an incentive to stay with them even longer.