Money in offset and Loan recasting

Anyone done it before as a way to minimize PPOR mortgage repayments and have more cash flow available? Not sure if it's even possible in Australia...

The main disadvantage that i can think of is that a recast will mean less flexibility moving forward as in one will loose the redraw option that you might still have if you simply pay a lump sump into the mortgage and i also realize that their will be a loss of tax savings benefits in the future if the property turns into an IP but if cashflow is what matters most, doesn't seem like a bad idea if the property will be the forever home.

Cheers

 

What is it?

 

"Loan recasting", isn't a term I've heard before (sounds like someone made it up for marketing purposes). I assume it refers cancelling some of the redraw amount and lowering the limit on a loan?

It does reduce your repayments but in many cases I can think of ways to do things a little "smarter" if you're planning to invest. I'd get some finance strategy advice before doing this.

 

That's pretty much it Peter. I've seen the term used in the US market before but all it means really is recalculating the loan terms as you mentioned. I think another term for it is s re-amortised.
In a normal situation(from what i know) when you pay a lump sum on your mortgage, you will only reduce the interest part but the repayments will remain the same. So if you have money in an offset account and decide to pay down the mortgage, your repayments are still the same but you will pay off the loan in a shorter term. So cashflow wise, you are not better off.

On the other hand, if you ask for a recast/recalculation of payments to the new sum(mortgage - lump sum from offset), you will lose the redraw but you will have lower repayments.

 

Had been wondering about this as I recently topped up my offset by quite a lot (after selling a car) and noticed that the loan repayments stayed exactly the same (but obviously a lot more going to principal.)

I think the simplest way to achieve this "recasting" is to split off the desired amount and just pay it off.

 

If your serviceability is limited it can help improve it, but a better way would be to refinance to a new loan on a new 30 year term as this will result in lower min repayments.

 

Few things I look into before going down this path
1) Current interest rate and if something better can be achieved
2) Switching to interest only (interest rate will be little higher) if numbers stack up and switch back when cashflow situation improves ..
3) Refinance for longer term (30 years) like Terry_w mentioned above

Will strongly suggest to get in touch with your broker to work out the best strategy depending upon short term/long term goals ...

 

@paulF what are your longer term goals? Could that redraw be used for investment purposes? With a slight restructure this could be both tax effective and cheaper than a regular investment loan.

Right now having money in redraw gives you a lot of options. 'Recasting' will take away many of those options and there may be better ways to do things. Improving your cash flow may help you on one hand, but depending on the bigger picture it may actually be a step backwards.

Explore your options before making any commitment. You can always recast later if it suits you.

 

Thanks for the replies so far guys and not thinking of doing this myself. Just a curiosity exercise ...

I put some scenarios below to try and get to the optimal case that saves most in cashflow assuming a Loan amount of 450k , interest rate at 4.22 % and a 200k sum of money that gets received after 5 years of owning the property(from inheritance, selling a toy...).

Scenario one: simple Loan of 450k at 4.22% over 30 years



Scenario 2: Simple loan with offset of 200K starting after 5 years of starting the loan. Saves time and interest but repayments are still the same. This scenario just shows what will happen if the mortgagee doesn't change anything and simply leaves the 200k in the offset

Third Scenario: Refinance back to 30 years option after receiving 200k five years into the loan(new loan value after paying it down for 5 years = 408K)

Fourth scenario : After receiving 200k five years into the loan , pay down the loan and ask for recasting/ re-amortizing loan payments which effectively leaves the mortgagee with a loan amount of 408k - 200K = 208k that is still under a 25 year contract so no refinance needed.


Unless i'm doing something wrong with the numbers, the recasting option seems to be the winner from a cashflow perspective and by a fair bit too 1999.96 - 1123.32 = 876.64$ monthly cashflow surplus.

 

@paulF is your only objective to pay off this loan, or are you investing or anticipating borrowing to invest in the future? If you're investing, then recasting will probably not do you any favours as you could use this money better.

 

Westpac did this automatically for me. I didn't ask for it.
I didn't have an offset account, so I just kept putting extra funds into the mortgage itself. About a year later, I got a letter saying that my repayments were now less due to the extra repayments I had made.

Was basic loan for PPOR.
I'll even try find the letter later in the week.

 

I think the main disadvantage that others are pointing out is that you are taking on a lot of opportunity cost - you no longer have that $200k available for debt recycling / investments / rainy day / sudden mid-life crisis.

In light of this, I think the best method would be to split your (at 5 years) $408k loan into a $208k P&I ($1,123.32/mth) and a fully offset $200k IO ($0/mth) which you can keep handy for your next investment opportunity.

 

All comes down to what your end goal is mate ...

 

Thx guys and again, the above is not something im looking at doing myself. It was simply an exercise in numbers.

Been reading a few comments about borrowers expecting their paymemts to go down the more they put more funds in their offset accounts(which is what i expected too years ago...) but that is not the case so i thought i'd look into it a bit more and after a bit of reading , re-amortising/recasting came up a few times and hence the thread