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Repayments when paid LOC reverts from IO to P&I

Discussion in 'Property Finance' started by chylld, 13th May, 2016.

  1. chylld

    chylld Well-Known Member

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    Let's say an IO loan reverts to P&I (IO could not be extended for some reason.)

    I think I understand what happens when a 30-year SVR loan reverts after say 5 years: the repayment amount is recalculated based on the loan balance at the 5-year mark and a remaining loan term of 25 years. Standard repayment formula that gives a constant repayment amount (for a given interest rate) and will largely consist of interest at the start, and principal at the end.

    What about a LOC that is either partially or fully paid off and accruing less interest than when fully drawn?

    If the LOC limit is used for calculating the repayment amount, then it will be paid off much faster than 25 years. It seems the only logical way is to recalculate the repayment each month based on the current balance, and have the LOC limit reduced by the principal portion of that repayment?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    LOCs don't revert to PI, but just incur interest daily and added monthy.

    Once you have used a LOC it would be a good ideal to consider converting it to a term IO loan. You will get a lower rate and it won't be at call. It will also help with serviceability - generally.
     
  3. chylld

    chylld Well-Known Member

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    Thanks Terry, logically it makes sense that a LOC never reverts to PI.

    LOC product has been super useful in setting up our funds (mostly 1 LOC per fund) but I'm keen to go back to SVR for properties and long term hold funds, whilst retaining some LOC-like flexibility for the smaller funds that I intend on building up.

    Can I combine multiple LOCs (all same general purpose) into 1 SVR? e.g. 4x 50k used LOCs -> 1x 200k SVR?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    you could, but should you?

    There would be mixing of purposes if these LOCs were used for different investments.
     
  5. chylld

    chylld Well-Known Member

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    That was my gut feel, which is why I kept them separate (and to avoid any issues should I need to sell one at a loss.) That said, they are all managed funds owned by the same people in the same ownership ratios, and my accountant said it won't affect tax deductability if I buy multiple funds with 1 LOC.
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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