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Maximum borrowing limit or put more into the deposit?

Discussion in 'General Property Chat' started by Rich W, 2nd Mar, 2016.

  1. Rich W

    Rich W Well-Known Member

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    After we sell our house we'll have a load of cash in the bank to use as a deposit for a new house. Just a background, I only own 1 house to live in and not interested in any investment properties atm.

    In your opinion, when we purchase our next house, do you think its financially better to take out the maximum allowed loan leaving heaps of spare cash in the offset account? Or do you think its better to tie up the money in a bigger deposit to reduce the repayment amount? FYI the LVR would be around 60% if we bought a new house with max deposit so no issue with mortgage insurance.
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Depends. If you are a spender then minimim loan may be better.

    But if discipled an 80% loan with the rest in the offset may be better because if you were to ever rent the property out you would have a higher deductible debt.

    Keep in mind some who think they are disciplined end up being tempted by that large sum of money in their account.
     
  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Usually this question is around 80% vs 90% LVR rather than 60%, but fair enough, this is predominantly an investment forum and people here tend to hold a certain bias. ;)

    If you're never going to have another use for the extra money, then minimising your mortgage is obviously a good thing. It's only prudent to keep a bit in reserve, but that probably don't need to be 20% of the property value. In this case figure out what a comfortable reserve is and leave drop that into the loan's redraw or an offset account as appropirate.

    Alternately you could split the loan into two parts, one for the 60% you need, the other for 20%, which you'd then offset with the remaining cash (make this one interest only so it doesn't actually cost you anything). This gives you the opportunity for flexibility later on as you've still got easy access to your savings in a manner which can be adapted to all sorts of scenarios.

    The downside of the second scenario is that you need to make sure you don't spend that extra 20% on 'wasteful stuff'. GIven you've managed save so much, this may not be a problem.
     
  4. Rich W

    Rich W Well-Known Member

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    I'd love to have saved that much but in truth I have only made that money due to the Sydney boom since I have owned the house since 2007. Unfortunately I haven't really attacked too much off the original loan and had to refinance due to cash flow issues after having a family and wife not working. Therefore having the extra cash in reserve would be good for a rainy day only.
     
  5. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Hi @Rich W

    What are your longer term plans?

    Are you looking to purchase again after the next?

    If you're having issues with cashflow - maybe look at chipping in 20% plus costs and parking the rest in the offset. That will reduce your interest and help you pay off the principal quicker.

    Cheers

    Jamie
     
  6. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Given all that, it's probably best to have a detailed discussion about what you're doing and perhaps some risk mitigation strategies in place?
     
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  7. albanga

    albanga Well-Known Member

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    I much prefer borrowing at 80%.
    I'm doing this as we speak, borrowing at 80 but with savings would be -60%.

    Reason being my wife and I want to have 2 kids in the next few years, when we lose her wage then even at 60% on our current expenses we would be short each week a couple hundred. Yes we could cut expenses and scrape through OR continue to live comfortably and even though we are short each week that extra repayments come out of the savings in offset.

    If no savings in offset and we were short then the bank would come knocking!

    This way even though the monthly payments would keep ever so slightly increasing there is a massive buffer to get through many years of children until she is atleast back to work part time. Obviously income protection is in place if I were to also lose my salary.

    I much prefer holding my own money.
     
  8. BuyersAgent

    BuyersAgent Well-Known Member Business Member

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    @Rich W I have nothing further to add to above other that to say you have 2 of the top finance minds in the country offering advice. Suggest that working with either will see you doing better than any branch or backyard broker would achieve. Lucky you :D (and no i'm not on commission)
     
  9. Rich W

    Rich W Well-Known Member

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    Thanks for all the advice. Yeh I'm definitely keen on having money in the pocket in case I need it instead of having it locked into the house. Also when you have kids and partner earns less you have less borrowing power so best to get as much as you can now. Refinancing is an option however a bit painful to be doing every few years.