Curious Mortgage Question

Discussion in 'Finance & Banking' started by Rocket66, 26th Nov, 2016.

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  1. Rocket66

    Rocket66 Member

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    Hi all,

    We are increasing our home loan to put a decent solar system on our roof and mid application an odd idea came into my thoughts. Its likely that there is a valid reason why people don't do this but here goes anyway.

    Say you own a house (PPOR) with a current market value of $500k and have an outstanding mortgage of $250k with an offset account. Would it be possible to increase your loan, i.e borrow another $250k to put into the offset account effectively cancelling any interest?

    My guess is there are clauses written into mortgages that prevent this kind of thing otherwise banks would go broke but I imagine there are people out there that may be able to give a definitive answer?

    Rockett
     
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  2. Hodor

    Hodor Well-Known Member

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    Firstly you can only borrow to 80% in general without incurring loan mortgage insurance (LMI) so your $500k property with $250k owing would (generally speaking) allow you to get an additional $150k assuming serviceability is not a problem.

    There is no reason why you can't just take all the cash and put the excess into the offset account, why do you want to do this? What do you see as the advantage? If you plan to use some money for solar panels and some for investing you are creating a mixed purpose loan which is a bad idea and a tax nightmare. There may also be consequences in having the money sit in an offset for a period before using it to invest (I am unsure of this).

    Taking out a line of credit (LOC) may give the flexibility you are after. You only pay interest on the money you have taken from the LOC and the maximum amount is agreed on in advance.
     
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  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    As mentioned by Hodor, you won't be able to borrow $250K, most you'll get is 95% of the value if you're prepared to pay LMI, more likely 80% max LVR.

    But what you seem to be missing is that you'll be paying interest on the extra borrowed money, so you won't be paying no interest, you'll be paying exactly the same you were before.

    Let's say you borrow an additional $150K (total borrowing $400K, LVR = 80%)

    Value: $500K
    Current loan: $250K @ 5% interest = $12,500 interest per year
    New loan: $150K @ 5% intrerest = $7,500 interest per year
    Total interest payment: $20,000 per year

    Put that $150K into an offset account, saves you 5% interest = $7,500 per year, total interest paid = $20,000 - $7,500 = $12,500 ... exactly the same as what you were paying before.
     
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  4. Rocket66

    Rocket66 Member

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    QLD,
    It wasnt something I was at all considering doing but just thought about it the other night, couldnt quite get my head around how it would work.

    We simply topped up our mortgage by 10k and plan to put the $550 per quarter saving into the mortgage for the next 3 years or so. We were ofcourse offered the good ol' Certegy finance and told the price, then I called and said we will fund it ourselves and magically the price dropped by 3k!

    Think I found the 3k interest!

    Rocket
     
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  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    If you borrowed another $250,000 your debt would be $500,000! So even if you paid the $250k into the offset account you would still be paying interest on $250,000