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Serviceability question

Discussion in 'Property Finance' started by hash_investor, 9th Oct, 2016.

  1. hash_investor

    hash_investor Well-Known Member

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    I have some money sitting in my PPOR offset. If I deposit this money into the loan account does that increase my serviceability as money sitting in offset does not reduce the principal ?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Maybe.

    Only would work if you cancelled redraw
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    You'd have to have the limit reduced as well or they'll ignore the paid down funds.
     
  4. hash_investor

    hash_investor Well-Known Member

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    What limit?
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Loan limit.
     
  6. mikey7

    mikey7 Well-Known Member

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    Is it easy enough to lower the limit?
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes.
     
  8. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Hi @hash_investor

    Reducing the loan balance by depositing a chunk of cash won't improve your borrowing capacity. Why? Because lenders look at the loan "limit" rather than the current "balance" when working out borrowing a capacity.

    However - as has been mentioned above. If you deposited that cash into the loan and also reduced the limit - then your borrowing capacity would be improved because the loan limit is now smaller. However - you will lose access to the funds you've just deposited into the loan.

    Jamie
     
  9. albanga

    albanga Well-Known Member

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    Speak to a broker and get them to run your servicing based upon the reduced limit.

    What you don't want to happen is you pay down the loan and reduce the limit and THEN find out your servicing is poor. It could mean that money becomes trapped in your loan and you have just lost access to all your personal money.
     
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  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Since you have paid off the main residence you can consider whether to starting paying pi on the investment loans as this will omprove servicing.
     
  11. Redom

    Redom Mortgage Broker Business Member

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    Putting it back in the loan account itself won't increase serviceability, unless you want to reduce the loan limit itself. Excluding taxation consequences and differences between debts (i.e. assume your looking to pay down and owner occupier to fund more owner occupier debt) - this really has a nil effect. You pay down your loan and get a new one - overall borrowing amount is the same.

    Potential options:
    1. Stick it in an asset class that generates income that can be used by certain lenders quickly. Some lenders will take into account share income based on the balance of your portfolio. So switching $200k cash into $200k shares can aid serviceability with those lenders (generally larger ones

    Cheers,
    Redom
     
  12. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Lenders assess debts and liabilities at their limit - by placing funds into your loan account this will reduce the amount owing - but if it can be redrawn it's not going to be assessed at the lower rate.

    If you do cancel redraw you will no longer have access to those additional funds and minimum required repayments will reduce accordingly. Reducing your liabilities will increase your capacity to borrow further with the gained cash flow.

    This is all put on the assumption that the best thing to do is to pay down your debt - make sure you get specific advice on this as changes in the use of your PPOR may mean there may be a more effective use of funds than paying down the debt. (especially if it may become an investment property in the future)
     
  13. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Dont DIY. Get a broker (one form here) to advise you on the best course of action and what to do when as something like this needs to take into consideration what effect this will have on your short, medium and longer term goals.
     
  14. Magnet

    Magnet Well-Known Member

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    I'm trying to get my head around this. It's reducing the limit the same as 'capitalising' the extra funds into the loan @Corey Batt @Jess Peletier @Redom ?
     
  15. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    No. Here's how offset accounts and loan limits actually work...

    If you've got a loan with a limit of $500k and you've got $100k in an offset account, you still owe the bank $500k. The offset account simply means the bank calculates the interest to be paid on $400k.

    If you've got a loan with a limit of $500k and to transfer $100k onto the loan, you now owe the bank $400k and interest will be calculated on that amount. The limit of the loan is still $500k however.

    When lenders do their serviceability calculations, they use the limit of the loan, not the amount owing, nor do they take into account money in an offset account. It's the same principal as a credit card, it's the limit that counts, not what you owe or what you're paying interest on.

    Therefore if you want to improve your serviceability, you need to ask the bank to reduce the limit. Simply dumping money onto the loan isn't enough.

    Capitalising interest on a loan is a completely different concept and has nothing to do with serviceability.
     
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  16. Magnet

    Magnet Well-Known Member

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    @Peter_Tersteeg Ok, I think I understand now. So if this a a loan that we require equity releases from I assume we can't lower that limit as we then couldn't access equity?
     
  17. D.T.

    D.T. Adelaide Property Manager Business Member

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    I think what he's saying is, regardless of how much money you put in it, the loan is still $500k and that's what you'll be assessed on when you apply for more money. Simply paying it down doesn't change that, unless you specifically ask the bank to reduce it.

    If your house is worth say $750K, then you could tell the bank to reduce how much your loan is to say $400K, and then you'd only be assesed on $400k worth of repayments instead. You could then access equity by getting a separate facility for say $200K to use as deposit on more properties (being $750k x 80% - $400k existing).
     
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  18. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    What you're suggesting is that you've got a $500k loan with $100k in offset. You want to use the $100k in offset to reduce the loan to $400k, then release equity to a limit of $600k.

    The net gain of this process is $100k from where you started. There are certain circumstances (mostly for tax purposes, also known as debt recycling) where you'd do this, but keep in mind you're essentially creating equity by paying down the loan.
     
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