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Is it worth paying extra on var IO on a PPOR?

Discussion in 'Property Finance' started by kennyboi, 20th Aug, 2015.

  1. kennyboi

    kennyboi Well-Known Member

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    Is it worth paying extra on var IO on a PPOR?

    I had a NAB loan which go up by $2900/million.

    The PPOR is very unlikely to become Investment.

    I understand keeping it in IO provide flexibility for emergency, but is it worth that amount of money?

    What are your thoughts?

    Would switching to PI affect my future borrowing capacity?

    What other factors should I consider?

    Thanks
     
    Last edited: 20th Aug, 2015
  2. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    If it's not going to become an IP and you don't require additional cashflow/borrowing capacity from the IO loan then I'd revert to P&I

    Cheers

    Jamie
     
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  3. chylld

    chylld Well-Known Member

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    Every dollar that you put in after interest will save you 4-4.5%/yr... I'd ask myself if I can make that dollar work harder elsewhere.
     
  4. kennyboi

    kennyboi Well-Known Member

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    How much additional capacity would switching to PI be sacrificing if the loan is 1 Million?
     
  5. TaylorChang

    TaylorChang Well-Known Member

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    Reducing the loan limit will obviously increase the borrowing capacity.

    However, the lending policy is changing from time to time. Cash out policy may not applicable/available to you when you needed the most.
    Hence, normally I suggest client(s) to leave IO loan as long as possible, the choice of moving money around is your choice not the bank's.
     
  6. Redom

    Redom Mortgage Broker Business Member

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    Answer to this one depends on what you plan on doing with your investments. Doesn't seem to have a future deductibility impact given slim likelihood of it being an IP.

    If you need the I/O repayment for borrowing power, it may be prudent to keep it as is. If the pricing impact > additional borrowing power, then take the saving.

    Cant quite tell what your loan amount is, but we can ballpark the expense and borrowing power impact if you provide indication of loan amount.

    Quick little formula from the more generous calculators to give you rough figures:
    Difference in monthly repayment amount between P/I and I/O * 12 = Increase in yearly assessable expenses x 10-12 (borrowing power multiplier) = drop on borrowing power for next purchase.

    Cheers,
    Redom
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If it would never become an IP then I would go for the lower rate - first consider refinancing if possible. If you are staying put then go for the lower rate and you can always borrow against the property to invest later.
     
  8. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Never thought of this before, probably because the rates were previously the same.
    Might just go ahead and do this.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes it is new conditions these days so need to do some rethink of the strategies
     
  10. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Refinance .........................................
     
  11. kennyboi

    kennyboi Well-Known Member

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    Hey Redom, net loan on PPOR is about 1M. (1.2M less 200k in offset). How does this translate to more borrowing power if IO? I don't really understand this part. Wouldn't reducing P with PI increase future borrowing?

    What's the formula to work out monthly repayment on PI?

    Thanks
     
  12. citystar

    citystar Well-Known Member

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    I don't plan to convert my PPOR into an IP however the future is never certain. I have it set as IO with the 100% offset account linked to that loan.
     
  13. Redom

    Redom Mortgage Broker Business Member

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    Hi Kenny - long term, yes it will as you'll have less 'non investment' debt. But there's other ways to do this (e.g. paying down your loan from your offset funds, then re-borrowing in new investment loan account if required)

    But shorter term, if your approaching a servicing wall and would like to continue borrowing, some lenders will take the actual repayment you pay on your debt and apply a small loading (or not) to work out your borrowing power.

    Those aggressive lenders (e.g. NAB/FM/etc) are generally 'go to' lenders when you need borrowing power.

    With those lenders, you're borrowing power will fall as you've increased your 'actual repayment' from the I/O amount to the P/I amount.

    On 1.2million, you've increased your monthly expenses by $1500, or 18k per year. This has a pretty massive difference on your borrowing power with those lenders (over 200k).

    When making a choice like this, IMO its worth mapping out whether this is a cost that you'll likely need to realise at some point, or whether it doesn't apply to you. That will depend on your plan, investing goals, etc.

    Once you work that part out, weigh it up against the financial benefit you get.

    OR - take Rolf's advice. Refinance to someone that doesn't price based on repayment type! I've had quite a few NAB PPOR refinances of late as a result of their pricing model and people wanting to keep their I/O term - it makes NAB very uncompetitive for some O/O.

    Cheers,
    Redom
     
  14. albanga

    albanga Well-Known Member

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    As long as you are diligent with your money I see no advantage to paying down the debt, reasons being:
    - You just never know what life will throw you so why not have the flexibility if things change and it becomes an IP.
    - You never know what life will throw you and what happens if you get injured and can't work? I know I'd rather have money in my offset as opposed to paid into a loan that I could never access again unless I sold and rented.
    - You never know what life will throw you, what happens if everything went belly up American GFC style and all those extra payments means you have money tied into a house now worth 50k. Good luck getting equity released then.
     
  15. kennyboi

    kennyboi Well-Known Member

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    Has the rules been tightened on IO period renewal on a PPOR? Is it still easy to renew IO term on a PPOR?
     
  16. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Getting harder