Increase Borrowing capacity by going interest only

Discussion in 'Loans & Mortgage Brokers' started by Chotu, 23rd Dec, 2019.

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  1. Chotu

    Chotu Well-Known Member

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    Hi

    I currently have 4 IPs and 3 of them are Principal and Interest, and the 4th interest only.
    If i refinance with another bank and go interest only on all, would I be able to increase by borrowing capacity for a new Investment Property?

    Quick Details
    Property 1 - value 500k, outstanding balance 220k - P&I repayment 1300 per month
    Property 2 - value 450k, oustanding balance 220k - P&I repayment 1200 per month
    Property 2 - value 420k, oustanding balance 220k - Interest Only repayment 750 per month
    Property 4 - value 720k, oustanding balance 576k - P&I repayment of 2600 per month

    My gross annual income: 140k
    Wife's gross annual income: 100k
    Gross annual rental income: 65k

    If sounds doable can someone help me refinance these mortgages and get pre-approval for a new property?
     
  2. Terry_w

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

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    Generally IO will hurt serviceability more than PI

    What you need to consider is extending all the loan terms back to 30 years, get low interest rates, loan shuffle the investment debt over to OO rates and debt recycle.
     
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  3. Chotu

    Chotu Well-Known Member

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    Hi Thanks for your answer - what is OO rates and what do you mean by debt recycle?
     
  4. Terry_w

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

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    Owner occupied rates - generally lower than investment
    Lower rates not only saves you interest it can improve serviceability - and you can maintain tax deductions

    Debt recycle is the conversion of non-deductible debt into deductible debt. See my tax tips
     
  5. Morgs

    Morgs Well-Known Member Business Member

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    Unfortunately IO loans will be assessed on their P&I term (usually 25 years for 5 years IO). Take the example of a $500K investment loan at 3.50% the actual repayment will be $2246pm over 30 years, but $2504 over 25 years. Lenders then apply the usual buffering (+2.50% on actual rate for most) and this will apply to all debts not just the new loan.

    Your overall servicing will depend on other variables - e.g. if you have existing rental commitments, if you have other liabilities, etc. but it sounds like you may be in a position to make it work.
     
  6. Chotu

    Chotu Well-Known Member

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    Thanks I'm with CBA and have interest rates of
    4.04% for 2 properties (fixed rate until mid 2021)
    3.5% for the one with 576 balance, variable rate
    4.04 variable rate for the interest only property with 200k balance.

    Looking at this and me and my wife;s income do you reckon you can recommend a better package/refinance deal with someone else and increase loan terms to 30 years again?
    current loan terms
    20 years remaining
    24 years remaining
    27 years remaining
    30 years remaining
     
  7. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    When lenders assess a new loan application, they look at the existing loans and calculate the repayment using the repayment period after interest only ends, plus a rate buffer of 2.5%.

    Thus interest only loans service worse than P&I because (a) IO rates are higher and (b) the calculated loan period is shorter than a P&I loan.

    To improve future servicing, the best option would probably be to refinance all the loans to a 30 year P&I period with the lowest possible rates.


    There's also a number of additional loopholes with certain lenders to either use or avoid in certain servicing scenarios. Getting the most out of your serviceability requires a very detailed understanding and careful planning. The problem is that a lender only needs a minor policy change and it the plans can be completely invalidated.
     
  8. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    IO in and of itself with APRA lenders will hurt as advised above

    There are lenders that DONT have a deposit taking licence and thus, if you have IO loans with other lenders, those NON apra lenders take a more pragmatic view for subsequent lending, which is why structured lending is key for someone like you

    Still need to be able to service the loans personally though, no point relying on what a lender will lend you - that may be considered as foolish.

    ta
    rolf
     
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  9. Terry_w

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

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    Yes, especially if one of the properties is your main residence.
     
  10. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    There's P&I investment rates well below 3.5%, owner occupier rates around 3%. Fixed rates can be even cheaper in some cases.

    It would be worth getting a quote for the fixed rate break costs. Often this would make it uneconomical to change the fixed rates. There's also the question of how necessary it is for your serviceability.
     

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