Hi guys
Need some help with personal loan and home loan, below is my situation..
I currently have an interest only home loan with offset facility with an interest rate of 5.31% and a loan term of 30yrs, I also have a personal loan with a flat rate of 5.22% and a reducing rate of 9.49% and a loan term of 4 years.
I want to know if I am better off paying the personal loan off in full which would incur a 1% fee (approx $490) or putting the personal loan funds into the offset account? I’m not sure how this works with the different rates (flat/reducing) but basically I just want to know whether I will be ahead or behind once I put the funds into the offset given that my home loan repayments will reduce but I will be paying personal loan repayments as well?
I know there are other implications of having a personal loan i.e. being a higher risk client for financial institutions etc. but I just want to know from a purely financial perspective whats the best option.
Any help would be great
cheers
Personal loan at 5.22%,
That’s cheap, where do you bank again?That is a cheap personal loan.
What are your longer term plans? Are you looking to purchase more properties?
If your borrowing capacity is on the tighter side, then getting rid of the personal loan may help future serviceability.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks Jamie
Yes it is a very cheap loan, pretty happy with it.
My serviceability is excellent at the moment so I’m not too concerned about borrowing capacity. I really just want to work out whether I’m ahead or behind purely from a financial point of view if I have the loan funds in the offset or am I better off not having the loan at all? I also don’t really understand how my personal loan has a flat rate and a reducing rate at the same time – I am paying principal and interest so therefore by default the personal loan is reducing – does this mean I am paying the reducing rate?.. in that case its not so cheap at all.
My finance skills clearly need some work… any help will be greatly appreciated
Hi Se7en,
As I understand it, you may choose a flat rate or a reducing rate. With flat rate loans, the % is owed on the TOTAL amount even as you reduce the amount still owing.I think (long time back now, so can’t be sure) there may also be a fixed term to it e.g. You can’t pay it off within a certain time frame, or, if you do, you STILL owe the flat rate interest on the full amount until that time frame has passed.
Have a read of the fine print – the flat rate of 5.22% may SOUND great, but in actual fact it may have a nasty sting in its tail. You may well find it is roughly equivalent to a 9.49% reducing rate, give or take….
Benny
I would concur to pay off the personal loan to increase serviceability. Although I did have a personal loan once on a flat rate and paid it off early with no penalties. So worth finding out what your terms are on the flat rate.
Finance Broker
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Benny, what you are saying were my thoughts exactly however it seems they have not asked me to decide between the two rates and on the paperwork I am given both rates as if they can exist simultaneously, I’ll have to chase this up with the bank and find out.
Financial Broker, Agreed any sort of debt is a liability, however assuming this will be my last loan for a very long time I want to know my standing point given the two scenarios 1) with the personal loan in offset 2) without the personal loan at all – ahead or behind
Anyone have any ideas? – wish I studied finance!
Hi se7en,
I only recently realised you are talking to me:) need to get used to this. Finance Broker or Kathlene is fine.
If your mortgage is currently for a rental property I would say the tax savings you get on the interest paid would outweigh the expenses on the personal loan that may/may not be tax deductible. In terms of financial cost effectiveness I would say you are no better or worse off if you pay out the personal loan or keep the money in an offset facility. Again this really depends on the terms of the personal loan contract as we are speculating that you are paying the same amount for the 4 year term regardless of the type of rate, flat or reducing.\
cheers KathleneFinance Broker
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I’m making a lot of assumptions here but this is how I figure it:
Secured Personal Loan: $49,000 – 4 yrs @ 9.49% and monthly repayments. Total interest paid over 4 years is $9,992.56
$49,000 offsetting HL @ 5.31% over 4 years – interest saved/offset $5449.70
Is the HL an IP or PPoR? As then you would need to take into account tax deductions too as by no longer offsetting you would be increasing the interest accrued on your deductible debt.So if you pay out you PL now and no longer have the money in your offset you will save approx $4534 – $490 repayment fee. BUT there is a lot of assumptions being made here without knowing the specifics of your situation.
Is the personal loan secured? Is it with CBA – they have risked based pricing so offer you a base rate, and depending on the risk add their risk margin on top of that giving the end rate of 9.49%
Kinnon Bell | Kinetic Funding
http://www.kineticfunding.com.au
Email Me | Phone MeMortgage & Personal Loan Broker based in Cairns and Melbourne but servicing clients Australia wide.
this doesn’t make sense! Borrow at 9% and invest at 5%?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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