CommBank allow IO fixed rates to convert to P&I?

Discussion in 'Loans & Mortgage Brokers' started by Mal P, 8th Apr, 2022.

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  1. Mal P

    Mal P Well-Known Member

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    Hi folks

    At CommBank I'm looking at converting the IO loans on 3 out of 4 IPs over to P&I, where those 3 have ~3 years remaining on the fixed rate period. One of the loans I'll keep IO + variable to allow offset cash to keep reducing the repayments to soften the repayment balloon. Rents are rising fast and it's time to finally start to pay down loans as much of the increased repayment will be paid by the increased rents. IO was an amazing strategy to be able to afford to buy and hold and allow CG to go into overdrive over the years.

    Question - and I've sent an email to my CommBank advisor but on NetBank they allow me to switch online from IO to P&I even on fixed rate loans it seems. How does that work? Why would they allow this? They also show that I'll get a reduced interest rate for P&I. Is this a mistake on their online algorithm because why would CommBank allow themselves to be deprived of extra money or break fees? Their fixed rate loans allow $10k per year to be put in without penalty so is it because my loans are coming in under their threshold? Or is it because of APRA rules that make it favorable for lenders to de-risk their client base?

    So curious! Thanks!!
     
  2. inertia

    inertia Well-Known Member

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    Just because they make it easy to change, doesn't mean there wont be fees or penalties to do so.
     
  3. Mal P

    Mal P Well-Known Member

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    Cheeky! Well, out of curiosity I submitted the online request (hey what's the worst that could happen) and they processed it pretty much straight away. They kept the remaining fixed rate period, lowered the interest rate and changed to P&I. Crazy! Would love to understand why they allow this.

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  4. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    In what universe is any lender currently offering a 5 year fixed rate of 2.94%? The CBA's current published package offer for this product is 4.39%.
     
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  5. Lindsay_W

    Lindsay_W Well-Known Member

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    A better strategy to start with would have been to have part of the existing loans split with a portion on variable IO so you could stash the additional cash in an offset against it.

    But if you prefer to pay down the debt then that's fine, especially if you're not getting a tax benefit from them and or don't have any non-deductible PPOR debt to get rid of first.
    If you do get that rate then that's really good, cause there ain't any 5 year fixed rates like that on offer anymore.
     
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  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    You wont need to break it to achieve this. Most (if not all) lenders allow SOME principal repayment before thay assess break costs as a penalty. Check what is permitted and you can just up your own repayments and avoid any penalties. Just know what is allowed and stay between the lines.

    Breaking will only be a benefit if you can save more on variablke over the term that the future fixed rate. With expected rate hikes that could be uncertain.
     
  7. Mal P

    Mal P Well-Known Member

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    To provide more context, I fixed back in 2020 for a 5 year IO period and the rate was 3.14% and when I converted to P&I today it appears to be the same ‘product’ with the same fixed period end date as before but with a lower rate given the P&I bit… I’m presuming because the loan product is structured to encourage the principal to be paid off. Still weird that they would allow the switch during the fixed rate period given they do lose money but hey I’m not complaining!
     
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  8. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    The way most banks approach this is you simply make extra repayments through a simple bank transfer. When you make a transfer that would exceed the limit, they return that and any future transfers rather than charging penalties.

    If you want to pay out beyond the allowable limits, you need to pay off the entire loan, it can't be a parcial payment.

    Worth noting that I've investigated a few lenders on this topic but this approach may not apply to every lender.