Existing PPOR mortgage is 4.3%ish BankWest I/O variable. Price growth since purchase (favourable valuation pending) means I could take out some equity AND effectively reduce below 80% LVR (assuming lender allows it). In the current climate, can I actually do that though? (i.e. maintain interest only at/around that rate?)
You wouldn't need to actually touch the existing IO loan - so you can just leave that be. You would be doing an equity release which provides a seperate loan account, not a topup. Bankwest can be a bit finnicky with releases and their servicing calc isn't great - so best to speak to your broker to see if in your exact circumstances that they'd let this fly. Otherwise worst case you can look at alternative options with other lenders. I'm assuming the PPOR is IO because you're going to move out of the property and make this an investment property in the future? Or another reason?
If you have paid LMI then youmay be able to get moe than you think. BWA is okish for cash out even in LMI space ta rolf
I had no idea this was the case, thanks The main I/O motivation is for better cashflow/serviceability when I want to buy an IP. My PPOR is technically 50% IP with the spare room rented out. One day down the track though I will move out and convert it to 100% IP.
Cheers Rolf. It was indeed purchased with LMI (LVR at purchase must have been around 88% in 2014). I was only thinking to keep the LVR under 80% with the equity release because I thought it would result in a better interest rate + flexibility to move lenders if necessary. I'm not looking to buy in 2017 now, but looking to get access to the equity so I can act quickly whenever I am ready in 2018.
With most lenders you're actually reducing your borrowing capacity by having the loan IO. Likewise you could be getting a rate of 0.5%+ cheaper if P&I, which would increase your equity position to draw future equity releases from so I might suggest you consider whether you're getting the best benefit from IO.
The IO/P&I debate is about a lot more than price - it has to be based on strategy and your future buying plans. Chat to your broker to make sure that what ever you choose is going to work for your longer term plans, servicing, actual cashflow and so on.
I will chat to my broker Jess, but if P&I has better borrowing capacity AND better rate than I/O as Corey mentions, then in what scenario is it still not optimal?
If you want to buy more and don't currently, or won't after a purchase or two, service with anyone other than Pepper/Liberty. In that case sometimes an IO term of 1 or 2 years is ideal until you are completely finished buying. That way you get the best of all the servicing worlds.
This is the key part. IO/P&I there is a lot of finesse - your broker will be able to determine whether the impact is real or that your setup is currently inefficient. If your borrowing capacity is very marginal and your next purchase will have to be via non-mainstream lenders then it can be of value - whereas if you otherwise have a reasonable borrowing capacity, cash flow and don't have aspirations for building a huge portfolio in a short period of time you may be paying a premium for no realisable value.
can i know why I/O affects servicability? i thought most banks will apply 7.x% P+I assumptions as their base line for calculation of servicability?
Because some banks will base the repayments on the loan over the term excluding the IO period. e.g 30 year loan with 5 years IO - they would base the repayments on 25 year PI loan term. 30 year loan with 10 years IO - 20 year PI loan. The shorter the loan term the higher the PI repayments would be.