What is the downside of using an el cheapo lender while saving the next deposit?

I've just had Reduce Home Loans quote 3.54% for O/O I/O loan with 100% offset (with setup costs waived). This represents a saving of more than $2,700 a year on my current lender.

I am 100% for using a broker when things become more complicated, but what are the arguments against refinancing to these guys while I am sitting here waiting until I have an adequate deposit for the next purchase (and then refinancing again using a broker once an adequate deposit is available)?

If I am not tapping into equity from the PPOR doesn't it make sense to keep this loan on an el cheapo product and have the next IP purchase with another lender (using the guidance of a broker)?

 

1. is the offset really an offset or is it redraw is disguise?

2. can they settle in time? (if a purchase)

3. Can you increase the loan down the track and how easy is it to do this?

4. Do they pass on full rate cuts with RBA cuts (banks don't!) - try to work out if the cheap rate now could end up being not so cheap latter.

 

It can work but it's all based on assumptions.
You "assume" you can just refinance away, what's to say your circumstances have not changed and you can't?

Also what are the entry and exit costs. Save $2000 in interest but costs you $2,000 to exit and then enter into a new lender. You then get the benefit during that time off having a useless online bank.

The worst thing someone can do is look purely at a $ figure and not a bigger picture.

 

whats the downside? Focussing on the small stuff.

While your 'saving' the next deposit, 20%, because lmi is expensive? Another investor may have purchased earlier or multiple properties. They are paying a higher interest rate, but have a bigger potential for capital growth, and or more tax deductions/higher rental income.

All the best with it, their online reviews sound a lot better than other online lenders.

 

Timeline to next 10% deposit + transaction costs is at least 6 months away - more like 9.
$0 setup costs
$750 early exit with Reduce (recouped in 3 months of being with them)

I'm specifically looking at the picture by asking myself "what can I do to get to 10% deposit faster?". Refinancing is just one idea. Looking at second job ideas in addition.

 

Fair point. That's probably my biggest risk in going down this path and will be a good discussion point with my broker.

 

Hi tobe, are you suggesting that 'rate chasing' is the small stuff? I'm exploring all opportunities to get to 10% deposit + transaction costs ASAP - this is just one idea.

 

Yes, I know it's important, and it's a lot of money, but compared to missing out on further investment, it's small stuff. Especially if it's investment debt and the tax office shares the interest rate with you at your marginal rate.

In your case however maybe it's secondary, rather than small, because you are focussed on building the portfolio.

6 months to next one, then how long after that? Why are you saving a deposit for your investment rather than repaying your home loan and then borrowing equity for the deposit instead? This is usually more tax effective, and might be quicker too.
You will 'earn' more interest over the 6 months in your home loan than a savings account too.

 

My O/O repayments are 100% going into the offset so I essentially am paying it down and will use those funds later. Or are you talking about something different? I'm still slightly above 80% LVR but should be below that in the next few months (if the market is kind).

I feel like I have the basics covered (.e.g. all savings go into offset account + day to day live off the credit card + clear the balance each month).

After 6 months, who knows. Depends what the market decides to do in that time. That's why I'm trying to speed things up.

EDIT: I accept your point though and will be weighing the idea up more thoroughly with my broker.

 

Yep, sounds like you're doing the right thing. A variation is instead of getting those funds out of the offset, move them into the loan, reduce your oo loan and increase a new inv loan against your oo property by the same amount.

You then end up with a lower oo loan and a larger inv, deductible loan. Your 'balance sheet' remains the same, just a better structure tax wise, and a lower oo loan.

 

Will your broker get a clawback for the current refinance. This usually applies if loan is discharged 18-24 months after settlement. Some brokers pass this on to the client so you would want to refer back to your credit guide / quote originally provided.

Also if a broker does get a clawback it may effect your relationship so is this worth a couple of k in savings?

 

Thanks Both. Colin I was not aware of that. I'm about 25 months past settlement but I will double check my docs.

 

Should be sweet then

 

And taking money from redraw has a completely different tax consequence to offset accounts.