Being short-sighted being interest-rate focussed?

Discussion in 'Loans & Mortgage Brokers' started by NeverNervousPervis, 3rd May, 2022.

Join Australia's most dynamic and respected property investment community
  1. NeverNervousPervis

    NeverNervousPervis New Member

    Joined:
    2nd May, 2022
    Posts:
    1
    Location:
    Melbourne
    Long post, but TLDR - what's a good interest rate in this scenario? What else am I not considering?

    Scenario

    Couple with 350K pa earnings, 60K in extras pa (allowances, bonuses)
    Assets - One property $1.5M bank valued unencumbered (current PPOR) and two IPs part-owned, valued $700K (300K owing, but offset with $200K), $500K cash

    We have an interest in a future PPOR and meets our requirements in being in a blue chip Melbourne inner-east suburb that's short walking distance to amenities and public transport and ticks enough boxes from a "forever" house standpoint (ie. land size, house structure). Given the land size, we hope it'll do well from a capital growth standpoint over the next 1-2 decades.

    Things that would need improvement as an IP (~30K) and future PPOR (~200K, a decade down the road) as being reasonable things to budget in the future for. We don't anticipate living in the property for another decade.

    As an IP, envision that rent might be in the vicinity of $900, a 1.5% yield.

    A big 4 bank (via their private banking division) has come back and willing to cross-collateralise a loan with the unencumbered PPOR and loan us $3-3.2M. We believe that would be in the ballpark to secure the property. LMI is avoided as the total LVR across the PPOR and the future purchase is <70%. Servicing the loan repayments is not an issue. Bank has mentioned that, at settlement, the borrowed amount would be dropped into our accounts, and the $500K cash that we have would slot directly into our offset account - keeping us liquid. This sounds more preferable to us, than using the $500K cash to cover the deposit and upfront costs (~stamp, land transfer etc) and having nothing liquid at the point of settlement (and needing to build up accessible reserves in our offset account along the way).

    A 30-year PI loan (w/ offset) on this IP has been quoted at 2.53% variable.
    Any extra income that we get (based on past properties) - goes straight into the offset account on payday, minimising the balance and total interest paid over the lifetime of the loan. We figure that we may be able to clear the principle in 15 years (assuming that interest rates don't go to something >8%)

    Questions
    For relatively simplicity, let's assume a $3M purchase price and $180K of upfront costs and a 2.53% variable rate.

    Question 1...
    Option a) Borrow less (use cash for deposit+upfront costs) - not after liquid - lower monthly payments
    upload_2022-5-2_23-46-49.png

    Option b) Borrow more (cash is sitting in offset account) - higher monthly payments due to higher loan amount
    upload_2022-5-2_23-49-7.png

    Between Option A and Option B - am I correct in that by borrowing more in Option B, I'll be mandated to have higher re-payments - whist the interest in the same in payment number 1 - the extra principal being paid (due to the higher re-payments) means that the balance will go down quicker?

    Question 2...
    The major bank can secure pre-approval within the next week or so at 2.53%.
    I also have a mortgage broker on the task, but they believe that lower interest rate banks, such as HSBC, might be able to do 2.37% w/ offset, but approval is >4 weeks. Also aware of ReduceLoans Investor Rate Slasher which is 2.18% pa variable, 2.23% comparison rate.

    The Year 1 interest charged for an interest rate at 2.53% pa on a $2.68M loan is $67K - 2.23% is $59K. $10,000 less in interest seems like a lot - could be $10K going back into reducing the principle in the long term...

    Has there been much experience recently of a big 4 bank matching a 2.23% comparison rate under relatively similar conditions (ie. PI loan for IP on $3M at a reasonable LVR?).
    Or conversely, is there anything I can do to help the mortgage broker to get borrowing capacity/pre-approvals sorted with other banks done more efficiently?
    Or... am I being short sighted? What else should I be considering? What recommendations do people have for negotiating directly with a bank beyond - this lender is 2.23% - can you match it?

    Question 3...
    Bit of a more broader question - but if we don't go ahead with this particular property - what other strategies should I consider if we have a $3M lending capacity

    Would others consider 3x $1M more modern townhouses - which might be better from a cashflow perspective come retirement - but would probably mean that we would have to rent that bigger house in that future area 10 years down the track because it would be out of reach...
     
  2. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,130
    Location:
    03 9877 3000
    Firstly you don't need to cross collateralise. You've got equity in your existing property, you can set up an equity loan to cover the deposit & costs, then borrow the remainder for the next property separately. Cross collaterlisation only favors the banks and brings you very few benefits. It's best avoided and that's usually easy enough to achieve.

    Interest rates usually aren't the most important thing, but best to save a few dollars if you can. The major banks are the most expensive, the quote of 2.53% makes that immediately obvious. My experience is also that they're not competitive in the long run. Unless there's a specific reason, I prefer to avoid them these days.

    The other lenders you've quoted are also a little on the high side, especially for a 70% LVR. Brokers do have options for more competitive loans.

    Realistically you don't know what you don't know. Lending is not as simple as filling in a few forms, providing some pay slips and getting the money. Your immediately and long term goals are part of the considerations brokers use to form our recommendations. We also have your best interests in mind, a legal obligation that the banks don't have.

    Call myself or one of the other highly experienced brokers here to help you.
     
    Westminster likes this.
  3. Morgs

    Morgs Well-Known Member Business Member

    Joined:
    7th Dec, 2017
    Posts:
    1,791
    Location:
    Sydney NSW
    I'd suggest to firstly get the structure right with view to long term and all requirements/objectives. Quick wins can often be at the cost of the bigger picture; for instance we could put up a white label lender at 2.19% for <70% P&I investment but I'd never use them myself as an investor for various reasons.
     
    Westminster likes this.
  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    10,598
    Location:
    Gold Coast (Australia Wide)
    With that level of income, and tax paid an active debt recycling strategy using something like AMPs master limit product, some initial good financial planning advice, and a moderate to middling risk tolerance can often take 5 10 or 15 years off a 30 year loan term.

    Rates on that basis are "irrelevant", if you are buying a new PPOR

    Loans aint Loans

    ta
    rolf
     
    Westminster likes this.
  5. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

    Joined:
    23rd Aug, 2015
    Posts:
    1,546
    Location:
    Bella Vista
    Cba don't have the best products right now out of the majors..you'd only be going to them if it's policy or valuation driven.

    Most importantly.. why is there a need to cross the properties ?