Loan Splitting - The obvious choice?

Discussion in 'Investment Strategy' started by costanza, 23rd May, 2020.

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  1. costanza

    costanza Well-Known Member

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    Hi All

    I have a 500k loan on an investment property where I am paying P&I, on a Variable interest rate.
    Calling up the bank to reassess my situation, they are offering 2.5% Fixed for 2 years, or 3.3% Variable.

    Fixed option doesn't have an offset account, Variable does. I have 100k cash (that I prefer to have in low risk, so not stocks).

    The most cost effective choice seems to be to split the loan into 400k Fixed, 100k Variable. And dump the 100k cash into the variable's offset.

    Am I missing any considerations here? Especially as I want to buy a PPOR in 2 years, it seems like a good way to keep my interest payments low for now. I can use the 100k cash in the offset to go towards the PPOR, and then change the 100k Variable portion to Fixed as well.
     
  2. Property Twins

    Property Twins Mortgage Brokers & Buyers Agents Business Member

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    If you have plans to purchase PPOR in the next 2 years, is there a reason you are making P&I repayments toward an investment loan?
     
  3. costanza

    costanza Well-Known Member

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    Yes, unfortunately I did not get approved for an interest only loan.

    FYI here are some very simplistic calculations I used as a guide to calculate the interest payments:
    500k fixed : 500k*0.025 = 12.5k
    500k variable: 500k*0.033 = 16.5k

    400k fixed, 100k variable (100k offset) = 400k*0.025 + 0*0.033 = 10k
     
  4. Terry_w

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

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    The other thing to consider is that you have $100k now, but will you be expecting to save more? Your variable portion might want to be big enough to include future savings build up..

    BTW, if you could not qualify for all the loan to be IO, perhaps you might still qualify for say $120k to be IO? easier servicing.
     
  5. costanza

    costanza Well-Known Member

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    Your first point is something I did consider, however I thought anything I save above 100k I will put into other investments such as stocks. I just wanted to keep my initial 100k as cash.

    Servicing hasn't really been an issue as property is +ve geared, but I totally understand that I am just reducing my deductible debt by paying principal on an investment property which is not great. I didn't know it was a possibility to have a split a loan between P&I and IO, I can ask the bank about this. Any particular things I should look out for when doing this?
     
  6. Terry_w

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

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    Why were you not able to get approved as IO? Servicing can still be an issue even if the property is positively geared.
     
  7. costanza

    costanza Well-Known Member

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    Not 100% sure on why, I went through a broker, and I didn't question it too much when they said it wasn't possible. Hindsight I should have.

    But it has got me thinking, could an even better option be then to split the loan 400k Fixed P&I and then 100k IO (with the full 100k amount being in the offset)?
     
  8. Terry_w

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

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    yes as there would be no repayments on a fully offset IO loan. But I would make the IO portion larger myself.
     
  9. costanza

    costanza Well-Known Member

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    Great, I will ask the bank if this is an option. I assume there would be some refinancing involved however. Which might be a bit of a PITA as I switched jobs and am working overseas.
     
  10. Terry_w

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

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    that might be why you can't
     
    Archaon likes this.
  11. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member

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    There are a few lenders still ok with expat income depending on currency

    ta

    rolf
     
  12. kmrr

    kmrr Well-Known Member

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    Wow. This is almost a carbon copy of my situation except im on io. Same loan amount same rates except I have 300k cash.

    I want to deploy appx 200k into another property in 12-18 months and can save 50k pa. Do any of you have any suggestions on what my best loan split would be?

    At the moment I've decided to go 300k variable and 200 fixed for 3 years (2 years also an option).

    Dont mean to high jack the thread but it seems like you got the answers you were after!
     
  13. costanza

    costanza Well-Known Member

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    Currency is Euro. Do you know which banks are ok with this? Any of the big 4?