Question : Refinancing Process and Moving Offset $$$

Hi all,

Just a quick on to clarify the process of what happens to monies you have in offset accounts when you refinance from one bank to another. I'm a bit confused so thought if I can get it clarified with the forums help it may also assist others.

For example:
In the scenario in image attached it is a pretty standard refinance where the 2nd bank is taking over the loans from the 1st.

Questions:

1. What is the process for getting the money in the offset accounts tied to the mortgages at 1st bank moved to the 2nd? (example - for offset 1 do you just do a bank transfer?)
2. would it be better to pay out 'Loan 2' with the money sitting in the 'OffSet 2' prior to the cutover date?

Thanks in advance.

 

1. transfer
2. probably not - then you have to overcome the cash out objections.

 

Thanks Terry - So how would I pay back the original equity split (Loan 2) money to original bank? (or would the 2nd bank just absorb that debt and pay it back the $120k from new equity split loan (loan 4) of $300k?)

 

You would be refinancing it wouldn't you?

 

Yes it's a refinance, just not sure what happens to the equity split and the money still.sitting.in the offset against it.

 

The incoming bank basically repays the $120k split.

Prior to settlement, you can either use the offset funds to pay down the $120k loan, or transfer them into the new CBA account. You should have the number for this prior to settlement.

 

It is a loan so if you are refinancing that loan it will be paid out. If you are not refinancing it you will need to pay it off. The offset is a savings account it won't be touched on the refinance and will still be there after the loans are moved.

 

Depends which lenders - some will freeze it as they're not banks and the offset gets closed with the loan account.

 

Can I ask a stupid question related to the refinancing pricess above? How can you/broker make sure that the loan split 3 with lender B (Commbank) will match the original loan (loan split 1 with lender A) dolar by dolar. My understanding is that when you apply for the refinance, you will need to indicate the structure that you want for example $500k in split 3 (equal to the original loan balance at that time) and $150k in split 4 (equity release). But it may take several weeks until the refinace settlement. At the settlement date, the loan split 1 balance is not $500k anymore since there is interest charged on it. As a result loan 3 is not the same as loan 1 anymore. What will happen then? Is there anyway to make sure that loan 3 match loan 1 dolar by dolar at settlement?

 

Firstly, has to ask is it necessary for the loan amounts to match? Nope.

If the loans are interest only it will be easy to estimate. You just allow a bit of top for interest part way thru the month.
If PI the loans will be dropping with every monthly payment so you have to estimate this too. I usually estimate on the higher side if possible.

 

@Maadha offset accounts are just transaction accounts with a nice feature. A refinance doesn't usually do anything with transaction accounts so money has to be moved by the account holder.

@hieund85 the best you can do is estimate what the balance of the loan will be at the settlement, which is impossible to be 100% accurate as you don't know exactly when the settlement will be. I've been made aware of any tax related issues.

 

Thank you @Terry_w . So let say if I estimate on the higher side and hence set loan 3 at $500k and loan 4 at $150k. At settlement, loan 1 balance is $499k does it mean loan 3 will be $500k with $1k in its offset and loan 4 will be $150k with $150k in its offset? If we take into account all related refinancing fees (mortgage discharge&registration, rate lock, settlement fee) as well as the 1st year annual fee (for loan 3&4) can we choose which account these fees will be deducted from?

 

Do you mean you have not been made aware of any tax related issues? @Peter_Tersteeg

 

as part of the settlement you will instruct the bank where to put any surplus funds. if there are surpluses it will be used for fees first.

 

So I guess I can ask them to put the surplus of each loan into its offset account and what surplus to deduct the fees from, is that correct @Terry_w ? Like in my example, I will have $1k in loan 3 offset and $120k in loan 4 offset. The fees will be deducted from loan 3 offset.

 

Thats up to you. There is no correct or incorrect answer.

 

I'm not qualified to advise if a discrepancy between loans being refinanced is an issue. I've been in finance a long time and there is a usually slight mismatch on almost every deal. I've have never been made aware of an issue by anyone. Given how often I've seen this and that I have ongoing contact with many clients, I'd probably been made aware of this sort of issue by now.

I suspect that if there is a discrepancy, the issue would arise out of what you do with a surplus, rather than the discrepancy itself.

 

Thank you @Peter_Tersteeg and @Terry_w