borrowing equity and dont use it for sometime

Hi All ,

I heard that we can borrow equity on existing property with separate loan account. Don't have to pay repayments or interest until we use it. Can you pls let me know more details if it is true

 

You can't borrow equity, but you can borrow against property with equity, park the borrowed money in an offset account and not incur any interest until some of the money is used.

but lots of issues to consider.

 

If you have available equity in the property and borrowing capacity.
You don't pay anything until you use it, ONLY if it's an Interest Only loan and fully offset.

 

The same could be said about a fully offset PI loan - it would be reducing itself at a fast rate, and there would be no interest so are you 'paying' anything?

 

Yes, with a P&I loan you're still making repayments whether you use the funds or not, on the principal but no interest.
OP Said "Don't have to pay repayments or interest until we use it" did you miss that bit?

 

I've Recently pulled equity from an IP and have about 185k, which will be used to settle my property when it becomes titled to me in August.

What are some of the issues to consider here?

 

No I didn’t miss it. They might be inferring repayments from their own pocket

 

You haven't pulled equity, you have borrowed money!

some things to consider are deductibility of interest, mixed loans, IO v PI, where to pay the borrowed money, how to use the borrowed money etc

 

Is it being used to settle and Owner occupied property or another investment property?
Is the equity pull via a new separate loan split?

 

So you're saying cash in an offset isn't their own money?
If they had said "don't have to make repayments out of our own pocket" but they didn't so I responded to what they did say instead of trying to guess what they might have been inferring...

 

I wish it was free money, that would be nice! Equity was taken from a PPOR, now turned into IP to purchase another IP in August.

Loan is structured in the following way:

Lender CBA
Total loan amount $397,600

SPLIT #1
Product name MAV 2 Y Fixed $150K+ Investment Interest Only
LVR <= 90%
Loan amount $212,000
Loan Term 30 years
Interest rate 2.49%
Revert rate 4.21%
Monthly repayment $440 FIX I/0 (0 - 24 months), $744 I/0 VAR (25 - 36
months), $1,058 VAR P&I (37 - 360 months)
Rate type Fixed 2 years
Repayment type Interest only 3 years
Annual fees $395
Monthly fees $0
Offset account No
Redraw facility No

SPLIT #2
Product name Standard Variable Investment Interest Only LVR <=
90%
Loan amount $185,600
Loan Term 30 years
Interest rate 3.47%
Revert rate 5.13%
Monthly repayment $537 VAR I/O (0 - 36 months), $1,059 VAR P&I (37
- 360 months)
Rate type Variable
Repayment type Interest only 3 years
Annual fees $0
Monthly fees $8
Offset account Yes
Redraw facility Yes

 

Split 2 rates are high, especially the revert rate, in fact that's too high on Split 1 as well...
Is there a reason you didn't put Split 2 on the MAV package seeing as you already have it on the first split?
You'll likely get a better discount off the rates.
Guessing the bank set this up for you, not broker?

 

Some banks has a limit on how much usable equity you can draw out while some don't.

I assuming you're talking about interest only ateucture since its an investment, if its interest only then you don't pay anything if it's 100% offsetted.

 

Split 1 - good in comparison to the recently increases so you wouldn't want to break the fixed rate. But split 2 is a little mehhhh.

 

A question for my broker, I've got no answers for that one. Will Switch to P/I before the revert period, when i start hitting the BC ceiling on IO loans for future properties.

 

If you switch to P&I before the 'revert period' you'll just be on the higher revert rate sooner than if you waited.
Also you're paying $8 per month for fees on split 2 when you're already paying $395 per annum for the MAV package on split 1.
If split 2 was also on the MAV package product you would be paying no monthly or annual fees on that split as the $395 MAV package fee is payable once no matter how many loan splits you have.
Seems strange it was set up this way.

Note that loan discounts for the revert rate can and should be applied at the time of application, CBA is less likely to re-price existing loans (competitively at least) when no new lending is coming their way so it's better to do it when the equity release was being applied for...

 

Where is this money?

 

It's because their offset isn't a true offset, more like a 'redraw offset' in which case you would need to get in contact with them to reduce your minimum monthly repayments to factor in the cash sitting in the 'redraw offset'

 

We just re-financed our PPOR and borrowed extra money that we're going to use for an IP. This extra money is sitting in an offset which is directly linked to the account and it's an IO loan. As we haven't touched it, we won't be making any "payments" in that sense. It just sits there until we're ready to use it. Does that answer your question?

 

Everyday offset, linked to the loan.