Finance advice wanted

Discussion in 'Loans & Mortgage Brokers' started by Somepropertyguy, 27th Apr, 2021.

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  1. Somepropertyguy

    Somepropertyguy Member

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    Hi,

    I'm looking at potential options and general opinion about my home mortgage

    We're about to revert back to standard variable and am wondering what my best bet might be before locking in again. We're looking at a 2yr at 1.97% but could there be something much better available to us? It's important we have an offset attached (or whatever they call it nowadays, so that savings offset interest on the loan account)

    Thanks guys
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Hey, and welcome to the forum :) Fixed loans generally don't have offset accounts, so you might be better off with a split loan - part fixed, part variable.

    1.97% is pretty good - not the complete lowest, but still very good.
     
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  3. Somepropertyguy

    Somepropertyguy Member

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    Thanks Jess!

    I actually do currently have a split loan, with the variable portion almost maxed out on offset.

    We have been happy with the lender so guessing it's a pretty good deal and probably should lock it in
     
  4. Terry_w

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

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    Get some proper advice. we don't know all the details such as whether the interest is deductible, remaining loan term etc.
     
  5. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Fixed loans are generally cheaper than variable and 1.97% is very good. However it is only for 2 years. A longer fixed term with a higher rate might be more cost effective in the long run.

    Using very simple math:

    For a loan of $100,000 at 1.97%, you'll pay $1970 / year interest. It will cost you $3940 over 2 years.
    Then the loan might revert to a variable rate of 2.60% and it will cost you $2600 each subsiquent year.
    Thus over 3 years, the interest cost of this loan would be $6540.

    The same $100,000 on a 3 year fixed rate of 2.15% would cost $2150/year, a total of $6450 over the same 3 year period.

    This relies on a number of assumptions and I don't know what rate alternatives you may be looking at, but it would be worthwhile running through some scenarios like this before making the decision.

    Keep in mind the general expectation is that rates will all be higher in a few years, so there may be a lot of merit in longer fixed periods even if it comes with a higher rate. It may save you more in the long run.
     
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  6. Somepropertyguy

    Somepropertyguy Member

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    Can I also ask, if we sold in a year let's say, how do they calculate break costs on fixed again? I used to be property savvy but haven't in a long time

    Thanks guys
     
  7. Paul@PAS

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

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    The lender uses voodoo magic to look at the agreed fixed rate v's the present market rate for same product for the remaining term and the applicable balance subject to the remaining term. If the remaining rate is less than the fixed they will calculate the loss based on this. The shorter the period and the narrower the spread the lower the cost. Especially since many short fixed rates have narrowed v variable rates. eg 1-2 year rates are quite low v variable.

    Most lenders include a PDS that explains this and includes examples when loans are fixed . Part of their disclosure obligations.
     
  8. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    They have a forumla which takes into account the current rates and the rates you fixed on. This may not be the actual fixed rate, but the cost of funding.

    In short, you're unlikely to be able to calculate the exit cost yourself, you need to call the bank on any given day for what the figure actually is. As a general rule, if rates are lower than what you paid, it will cost you money. If rates are higher than what you paid it will cost nothing.
     
  9. Somepropertyguy

    Somepropertyguy Member

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    So if rates were higher than I was locked in at there would likely be no break cost?
     
  10. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Probably not, but you don't know the actual variables from one day to the next. Hence you need to ask the bank for the actual figure.
     
  11. Lindsay_W

    Lindsay_W Well-Known Member

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    There are a few lenders offering fixed rate loans with offset accounts, they have some 2 & 3 year fixed rates of around 1.95% - 2.00% with the offset attached - you need to seriously consider if it's in your best interest to fix, especially if you are planning on selling in 12 months time, there are some OK 1 year fixed rates with offset as well.
     
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  12. Somepropertyguy

    Somepropertyguy Member

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    Thanks Linds' they sound like a really excellent product. I'm wondering what rates might do short-mid term but am expecting them to stay at record lows rather than go anywhere. I think property is priced so high now compared to income that any rises will see pretty catastrophic consequence and they'd head back down quickly. Actually have been tipping they'll stay low forever now as the new normal

    We're not planning on selling, but you just never know. Guess I just don't like being locked into things but do like the lowest rate
     
    Lindsay_W likes this.

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