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Query re loan term reduction

Discussion in 'Property Finance' started by moridog, 4th Jul, 2016.

  1. moridog

    moridog Well-Known Member

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    Hi, I was talking to a friend who uses a firm of "financial advisors" and has done for quite some years. They have advised friend and spouse to have them reduce the term of their mortgage, with the bank, in order to pay the debt off quicker, ie, shorter term, higher repayments, paid off sooner.
    I asked wouldn't it be easier just to double, or increase the payments and leave a small outstanding balance, rather than incur a cost (I assume there would be a cost to redo the loan), they feel compelled to follow the advice given, am I missing something or is there merit in this? i believe it is a P and I loan.
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    This is such stupid advice.

    What happens if down the track something happens and they can't make their inflated repayments? they can't just redraw any extra they've paid.

    This is really bad advice - the same result can be achieved just by paying more into the loan, with the added bonus that it's redrawable if required, and the over-payments can be be stopped or reduced if the situation requires it.
     
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  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Jess has used the technical term for this "stupid" which is what it is.

    Imagine the effect on borrowing capacity.
     
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  4. moridog

    moridog Well-Known Member

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    That's what I said, but they have been convinced and they're paying for this advice.
     
  5. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Inflexible advice which is unnecessary. As you've identified it would be better to just make voluntary extra repayments if debt reduction is the game - at least if there is a change in circumstances they can instead revert to the minimum worst case.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Far out - very expensive advice that they may end up paying for over and over again.

    Just goes to show that a little bit of critical thinking can go a long way - I would encourage them to question this with their advisor before acting on the advice.
     
  7. wylie

    wylie Moderator Staff Member

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    Send them the link to this thread. If they still go ahead with this, then they cannot say they were not warned.
     
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  8. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Agree with the others - seems silly.

    If they want to increase their repayments - just set up an extra monthly debit from their transaction/savings account into their loan.

    Cheers

    Jamie
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Are they the type that will spend every spare cent they have (before they get it)? This is the only reason that I could think of that would justify this advice.
     
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  10. albanga

    albanga Well-Known Member

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    Hey Brokers, as you are aware every single persons circumstances are different so I would need be so quick to label this stupid without knowing the reasoning why. On the surface I could not argue this doesn't seem silly but I can think of reasons for this and some of the reasons you have mentioned may simply not be relevant.

    Some people simply need to be FORCED to do something. You can make them pay a certain amount and be guaranteed it will be paid (The thought of defaulting will ensure they make payment). Versus "just pay the extra amount anyway".
    I know lots of people who simply would not do this! Heck I am guilty of this myself!

    If I was forced to pay a higher amount you could guarantee I would and would never default. But reality is I have excess funds every week I should be paying off my mortgage but I don't. I have probably been on 2 holidays in the last 5 years I didn't need to, simply because I had excess funds that SHOULD have been paid into my loan.

    You also need to remember not everyone wants to invest so the "It effects servicing" is a non issue. As long as they can service the loan at the decreased term then that is all that would matter.

    Don't get me wrong it's not something I would be doing and I certainly wouldn't be paying for this advice but I don't think you can label it silly without knowing the persons situation.
     
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  11. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    There are still better ways to achieve the same result. I find this to be high risk, especially if the borrower will be spending every spare cent that's left over.
     
    Last edited: 4th Jul, 2016
  12. Brady

    Brady Well-Known Member

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    Increase repayments and change method of operation to 2 to sign - puts in extra step whenever you're going to redraw.
     
  13. albanga

    albanga Well-Known Member

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    It would be good to know why they have said this. Surely im not the only one intrigued by it :)

    Can you ask your friend why? Tell them paying off the loan sooner doesn't cut it! (I mean that's the purpose but as others have suggested this can be achieved with higher repayments). Why with a shorter term? I would suggest your friends have a habit of over spending.
     
  14. moridog

    moridog Well-Known Member

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    I think they do overspend but they are still using a credit card which they struggle to pay off in full, despite being on pretty fair money with no dependants. I said I was not convinced being required to pay more would help, it may well just increase credit card debt. After all, these are middle aged people, you either want to reduce your mortgage by increasing payments, or you don't. From my perspective, paying for advice means you feel psychologically inclined to accept it, even though it may not be right for you. They have been seeing and paying these financial advisors for years now and don't seem to be much better off, if at all.
    I think there is a difference between accepting advice from an expert which differs from my preferred course of action, after all, why seek it out if you are not going to heed it, and accepting all advice slavishly. Hope that makes sense!
     
  15. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Agree with you.... maybe invite them over for a night of the game cashflow.
    If nothing else they should hopefully see the debt on the house needs to be paid off less urgently than any outstanding credit card debt?