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Savings vs Paid Down Loan Amount - What's Best ??

Discussion in 'Property Finance' started by MattA, 22nd Oct, 2015.

  1. MattA

    MattA Well-Known Member

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    Central Coast NSW
    Hello All

    To keep this thread on track, let me just say that I totally understand the concept behind how an offset account works and that I'm going to cost myself money if / when I buy a PPOR. Having said that, I like paying at least P&I on my investment loan if not more... call it forced savings!

    My question, from a borrowing perspective do banks prefer a big cash deposit or a smaller loan... or does it not matter?

    For example, would either of these positions make getting finance for a 2nd purchase easier?

    Option 1) Property 1 Value: $400,000 Loan: $240,000 Offset: $10,000

    Option 2) Property 1 Value: $400,000 Loan: $160,000 Offset: $90,000

    Thanks
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Understandable.

    Banks basically prefer smaller loans because it is easier to service, but you also need some sort of deposit, which could be equity or cash.

    Option 2 would win at serviceability.
     
  3. MattA

    MattA Well-Known Member

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    Central Coast NSW
    Hi Terry

    Thanks for the reply :)

    Just realised I stuffed up my maths in the above example... I'll try again, but what I was really asking is if the overall financial position is the same, is cash better than equity ?

    Eg 1) Property Value 1 $400,000 Loan: $250,000 Offset $100,000

    2) Property Value 1 $400,000 Loan: $150,000 Offset $0

    Matt
     
  4. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Banks only care about the savings you're not putting toward the deal to add to the strength of your overall position - if you can demonstrate savings it's good, if not, not so good.

    If you're not using them as funds to complete the purchase- ie, they'll be sitting in your offset after purchase - they don't think about them too much outside of what I've said above. This is because any cash not given as funds to complete can be spent in a heartbeat without the bank having any control over it.

    It's more to do with meeting bank policy and whether you can afford the loan you're asking for.

    If you can't afford the loan, you'll obviously need to chip in more cash to the deal to reduce the amount of the loan.
     
  5. Redom

    Redom Mortgage Broker Business Member

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    From a loan application perspective, its easier getting a loan for option 2. The loan amount and LVR are considerably lower, so you'll need to demonstrate less income to get the loan.