Your input on my situation.

[Richard Feynman]

I'm casting a net out to see what it brings back from you folks once a dialogue is open.

I will visit a broker but this topic is another means of exploring and considering as many options as possible prior to investing.

- Bought PPOR almost 2 years ago, before I was thinking investment
- 30 year loan - P&I
- Fixed loan for 15 years at 8.09% (I know)
- Maximum annual extra repayments are $10k (I pay weekly which covers $2k extra, so only need to come up with a further $8k)
- Loan balance <$260k
- Equity ~$80k
- No redraw
- MISA account is utterly useless on this loan
- A full refinance will cost me >$40k at the present moment (straight from CBA's mouth)

Now some more info.

- I purchased in the inner west of Sydney, and expect to see good CG on my PPOR.
- On my current income, were I to switch to monthly repayments and cease extra repayments I could save up to $10k a year. I'm already on an extremely tight budget and can't trim any more fat. I am capable of increasing my earnings a bit though.
- My investment strategy will be buy for CG and hold. I would like the option of retiring in 20-30 years
- $8k savings right now, meaning when my loan ticks over to its third year in about a month, I COULD drop the lot as one bulk extra repayment to save a lot of interest. But with no redraw, it's a one way street.

So, in my situation what do you do to propel yourself into the investment market?

I've been considering a lot of options but currently on my mind: when I can obtain finance, pull equity from my PPOR for a deposit to purchase an NRAS property ~$400,000 in an area that is likely to experience reasonable CG. Use the positive cashflow from this property to offset its investment loan, direct all surplus funds into this offset account, then, when I have enough equity again in PPOR and NRAS investment, use it + savings in the offest for a deposit to purchase a property purely to generate CG. Then continue to use equity to fund the purchase of additional investments CG-oriented investments in the future. Repeat.

I believe that this strategy will allow me to enter the market a lot sooner than I could with a negatively geared investment, whilst providing some growth and effectively costing me nothing. My income will likely increase annually, meaning I'll also be able to look at chipping in more from my own pocket towards negatively geared investments in the future.

So…your thoughts/suggestions/ideas/questions etc.

 

[Graemsay]

Paying down your mortgage probably isn't a bad option. Any investment would need to have a net yield of more than 8%, which would mean a gross yield of more than 10% once you've taken taxes into account.

If you know any safe investments that can consistently deliver that sort of yield, then I'm sure everyone on the forum would be interested.

Paying the lump sum in at the start of each year makes sense.

The cheapest mortgage rates are around the 6% mark. That would save $4K to $5K per annum, but if it's going to cost $40K to switch then it's not cost effective, so leave it. Besides, interest rates will probably rise again.

Before investing, I'd be looking into saving enough money to cover living expenses for six months.

 

[Aaron_C]

Ouch, 15 year fixed loan.
What you may be able to do to extract equity is to get another lender to take a second mortgage on the property. This will be tricky though so a broker is your best bet.

 

[Rolf Latham]

Couple of things

U should be able to get some io period on that loan

What is the current value and did u pay lmi when taking out that loan
TaROLF

 

[tobe]

Id move out and rent out the current PPOR, then break the fixed rate and claim the beak costs on your tax. The tax benifits and the savings on a nice new low rate will more than offset the huge break costs

 

[alexlee]

Id move out and rent out the current PPOR, then break the fixed rate and claim the beak costs on your tax. The tax benifits and the savings on a nice new low rate will more than offset the huge break costs

The variable rate is 6% a year v 8% fixed, on a 260k loan, with the break cost at 40k? The break cost is 8 years of the interest differential. How does it 'more than offset' the break cost? That's not counting the fact that youd have to come up with the 40k now.

 

[Player]

The variable rate is 6% a year v 8% fixed, on a 260k loan, with the break cost at 40k? The break cost is 8 years of the interest differential. How does it 'more than offset' the break cost? That's not counting the fact that youd have to come up with the 40k now.

Agree. Bank will not lose. Perhaps look at breaking in a couple of years time (or whenever rates start climbing again) to lessen the pain of the break spread cost.

 

[HiEquity]

Expensive lesson on fixed rates right here - both in terms of cost and what they do to your flexibility.

I would convert the loan to IO if possible, move out and rent it out. Refinance (with CBA) when there is enough new equity to extract to make it worthwhile, without breaking the existing loan - the break costs look too big and there is still some value in having the IR hedge - who knows where IRs will be over the next 15 years? Find a cheap place to live / rent yourself - if you rent elsewhere you will retain the CGT status of this place for six years from last living there. Chalk it up as a lesson and keep claiming the interest cost on your tax return.

Find ways to earn more however you can - move to where the work is, take up a career in oil and gas, etc etc. Then use your cash / equity to buy properties with a decent yield in excess of borrowing costs. Maybe do some renovating / developing to build sweat equity? The world is your oyster...

 

[jingo]

Agree. Bank will not lose. Perhaps look at breaking in a couple of years time (or whenever rates start climbing again) to lessen the pain of the break spread cost.

Great advice - wait for rates to go up again and then re-look at the break costs.


Regards Jason.

 

[Richard Feynman]

Thanks everyone for the input thus far.

Paying down your mortgage probably isn't a bad option. Any investment would need to have a net yield of more than 8%, which would mean a gross yield of more than 10% once you've taken taxes into account.

If you know any safe investments that can consistently deliver that sort of yield, then I'm sure everyone on the forum would be interested.

Paying the lump sum in at the start of each year makes sense.

The cheapest mortgage rates are around the 6% mark. That would save $4K to $5K per annum, but if it's going to cost $40K to switch then it's not cost effective, so leave it. Besides, interest rates will probably rise again.

Before investing, I'd be looking into saving enough money to cover living expenses for six months.

Regarding the 6 months buffer, therein lies one of the downsides of paying the $8k straight onto the loan. I'd have zero savings for a period and have to slowly build it back up.

However, I've already overpaid the loan enough to miss WELL over 6 months of repayments and another $8k will add another 15 weeks to that safety net.

Ouch, 15 year fixed loan.
What you may be able to do to extract equity is to get another lender to take a second mortgage on the property. This will be tricky though so a broker is your best bet.

I will look into this further.

Couple of things

U should be able to get some io period on that loan

What is the current value and did u pay lmi when taking out that loan
TaROLF

Yeah, I did pay LMI. Loan balance is just under $260k. PPOR worth approx $340k edit - I originally typed $240k here.

Would there be a cost involved with just paying interest for a period?

Agree. Bank will not lose. Perhaps look at breaking in a couple of years time (or whenever rates start climbing again) to lessen the pain of the break spread cost.

Yeah, I asked them two rate rises ago and the break cost was $25k so if rates do rise enough (perhaps on par with when I locked in) I will jump on the opportunity to break, if the numbers add up.

Expensive lesson on fixed rates right here - both in terms of cost and what they do to your flexibility.

I would convert the loan to IO if possible, move out and rent it out. Refinance (with CBA) when there is enough new equity to extract to make it worthwhile, without breaking the existing loan - the break costs look too big and there is still some value in having the IR hedge - who knows where IRs will be over the next 15 years? Find a cheap place to live / rent yourself - if you rent elsewhere you will retain the CGT status of this place for six years from last living there. Chalk it up as a lesson and keep claiming the interest cost on your tax return.

Find ways to earn more however you can - move to where the work is, take up a career in oil and gas, etc etc. Then use your cash / equity to buy properties with a decent yield in excess of borrowing costs. Maybe do some renovating / developing to build sweat equity? The world is your oyster...

Thanks for the input. I will be moving out of my PPOR in the future to rent it out (and doing a reno to increase rental income), but it probably won't be for a few more years so the discrepancy between rental income and mortgage repayments isn't so much.

Great advice - wait for rates to go up again and then re-look at the break costs.


Regards Jason.

As mentioned above in this reply, I am keeping a hawk-eye on rates with the aim of going that.


So on the matter of breaking when rates go up... if, in theory, I wait til CBA's rates are identical to what they were when I fixed, anyone know what kind of a break fee I'd be looking at? I spoke to them about this ages ago, to multiple people, all of whom said "rah rah our system is complex, can't tell you but it will be less than now, rah rah". Wouldn't give an exact figure...or even an approx one.

And it's a long shot but I may as well ask. Is there any means I may have now or in the future of negotiating a lowering of my fixed rate?

Thanks again for the responses. All are greatly appreciated.

 

[Graemsay]

I found this chart showing historical mortgage rates in Australia at Loan Sense.

Eyeballing it, I'd say that loan rates have mostly been between 6% and 8% for the last fifteen years, with an average of around 7%. Over the long term your mortgage doesn't look too bad.

Besides, it gives you insurance should rates exceed 8%.

In your situation, I'd look at (in no particular order):

• Increasing income. (Move jobs, become a freelancer or contractor.)
• Continue to overpay your mortgage. You'd need an investment returning over 10% per annum to match this. If you owe $260K on a $240K property then your options are severely limited.
• Build up a pot of emergency savings.

Investing should be done with money you can afford to lose, so would be a fourth point once you're a bit more comfortable.

 

[BMan]

if you wait till rates are the same then you break it wont the rates be going in an upward trend meaning you will go variable when the rates are on the rise...
your best bet is to hope rates go higher and then break it when there on the way back down again (when there level)

 

[Richard Feynman]

One typo, huge problem.

I found this chart showing historical mortgage rates in Australia at Loan Sense.

Eyeballing it, I'd say that loan rates have mostly been between 6% and 8% for the last fifteen years, with an average of around 7%. Over the long term your mortgage doesn't look too bad.

Besides, it gives you insurance should rates exceed 8%.

In your situation, I'd look at (in no particular order):

• Increasing income. (Move jobs, become a freelancer or contractor.)
• Continue to overpay your mortgage. You'd need an investment returning over 10% per annum to match this. If you owe $260K on a $240K property then your options are severely limited.
• Build up a pot of emergency savings.

Investing should be done with money you can afford to lose, so would be a fourth point once you're a bit more comfortable.

One typo, huge ramifications. PPOR value = $340k. I apologise for the misleading error.. I'd like to blame the 25 extra hours I've worked this week, but the truth is I just didn't proof my reply. I've edited the post to avoid further confusion and time-wasting. Sorry.

I can, and do freelance outside my primary job for additional income. Ultimate goal is to goal is to build my freelance activities into a full time business and grow from there.

Interestingly, the primary reason I fixed my loan was having looked at historical IR data. I recall my parent dealing with 19% in the early 90s (or thereabouts), looked at the longterm average, assessed my income and realised if I wanted to enter the market, I couldn't afford a couple of consecutive rises if my income stagnated.. it's continued to rise but that wasn't a given.

if you wait till rates are the same then you break it wont the rates be going in an upward trend meaning you will go variable when the rates are on the rise...
your best bet is to hope rates go higher and then break it when there on the way back down again (when there level)

Yeah, you're right. I should have elaborated a bit but wise words nonetheless. I'd like to break if/when the rollercoaster is about to dive after going above the rate I locked in at. I imagine I may be waiting a while.

Thanks again folks, valuable input.

 

[Kirsti]

You would still be ahead by renting the property now rather than waiting until the rent covers the repayments.

If you can rent another place for the same amount you would receive on yours then your tenants would be exactly covering your cost of living elsewhere but all of a sudden your property expenses (rates, interest, maintenance, building insurance etc) become tax deductible and you can offset against your employment income. 8% of $260k = $20,800pa, if you earn over $80k the ATO will pay 38.5% or $8000 a year for you.

 

[Richard Feynman]

Thanks Kristi.

I've been wondering about this scenario.

Having just done some looking, I've read that if I perform any cosmetic improvements, repairs, renovation prior to renting my PPOR out, I can't claim any of those as a deduction.

If this is the case, the only benefit in sprucing the place up a bit prior to renting it out would be to boost rental yield.

Anyone care to confirm this?

 

[Aaron_C]

Yes any 'improvements' to the property are considered of a capital nature and therefore are added to the capital base of the property and are depreciated over time rather than being deductible immediately. On the other hand, 'repairs' are immediately deductible because you are simply restoring the place to what it was before.

 

[lyndon01]

Any repairs you make before the property is rented are considered "initial repairs" and are considered capital nature. To claim repairs as a deductible expense, the damage has to be incurred while the property was being used to produce income.

 

[Richard Feynman]

Cheers for the clarification guys.

 

[Richard Feynman]

So, assuming I've got a healthy buffer, does anyone see any issues with making my full annual extra repayment allowance the day my loan ticks over to year #3?

As mentioned, redraw isn't an option which is my only concern. I'm now very much considering moving out of my PPOR in the next 6 months, renting it out and directing the surplus cashflow towards an investment deposit.

 

[Aaron_C]

Richard,

At this stage it is probably a good idea to put as much as possible into the fixed loan to reduce the principal. Each loan repayment you make will reduce the fixed loan principal, which is good because the rate is especially high, but also because if you do want to refinance next time a lower loan amount will make the break costs less painful.