Hi all,
I continually read that the most important thing to do is pay down your PPOR debt. How ever in my situation I dint know what to do.
I have found out there are restrictions on my loan as to how much I can pay off each year before Incurring early repayment fees. Apparently I can only pay off $5k p/year off my PI loan and only $2k off my IO loan. Total of $7k
My question is, should I just pay this amount off each year and save any additional money or pay as much as I can off the loan and just wear the early repayment fees for a long term saving on the compounding interest charges on the Loan??
Thanks in advance
Personally I pay a small additional amount each month off my loan, mainly so that when interest rates rise again it won’t change my repayments.
I’d suggest using an offset account for your spare cash, that way it’s still available to use and will reduce the interest on your PPOR loan. I don’t like the idea of re-drawing on 1 loan to purchases other assets.
Hope that helps, others might be able to expand on my point.
Cheers,
Do you have a fixed loan?
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
Cheers dtrain,
Ideally we would like to set up an offset account however before I started educating myself I locked my interest rate for 3 years (still 2 years remaining) which I have found out means that the package we have won’t allow an offset account while the interest rate is fixed.
So more so looking at advice for the next 2 years until we can set up offset accounts, credit card set up etc
Hi terry,
Yes is fixed, please see my most recent comment (we must have been typing at same time haha)
It might be worth asking the lender for the fee to break the loan? Just to find out and then work out if you think it is worth breaking.
If you invest the money elsewhere you will be earning money which will then be taxed. Whereas if you deposit it into the home loan you are saving interest which is tax free. If your rate is 5% then you would be earning a tax free 5% which may equal a 9% return invested elsewhere.
Also when you pay down the loan you can reborrow, setting up a new split, and then invest these borrowed funds. The interest on this loan will be deductible and then you can use the return on investment to pay down the home loan faster
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
Hi Barlow,
Terry’s idea is (I think) a good one – call your lender and ask for the “Break Cost” of your Fixed Loan (but be sitting down when they tell you – ;)The Break Cost increases as the difference between Fixed and Variable increases (and there has been a 0.5% drop in the Cash Rate in the last 12 months – which may or may not have become a drop in Variable Rate depending on the lender). In essence, if you Break out of a Fixed Loan, and the lender can then re-loan your funds to someone else for a HIGHER amount, then the Break Cost will be minimal.
Once the Cash Rate starts going UP again, is when the Break Cost will drop appreciably. The Break Cost also has TIME as a factor though – so the shorter the time before the Fixed Rate finishes, the cheaper the Break Cost. If you do determine your Break Cost, why not post it here – and in 6 months time too – we can then all see the pattern forming.
I broke a Fixed Loan – just once !! I spend a lot more time now ensuring I won’t NEED to break a loan. e.g. if you are planning to sell a place, DON’T take a Fixed Loan on it !!!
Benny
Thank you Benny and Terry,
your suggestions are great.
i have looked into it and at the moment it won’t be worth me “breaking” the Loan.
Apparently i will be eligible for an offset account in 12 months, rather than 2 years, as i an get offset attached as long as fixed interest period is no longer than 12 months.once again appreciate your thoughts.
Hi Barlow,
Apparently i will be eligible for an offset account in 12 months, rather than 2 years, as i an get offset attached as long as fixed interest period is no longer than 12 months.
Hey, that is a great option to know about – thanks for sharing it!!
Did you gasp when they told you the Break Cost? When I looked at breaking mine, I had already determined what monthly amounts they would no longer get from me, and calculated them at the usual Interest Rate – and yet the Break Cost they quoted was about 2.5 TIMES that calculated amount !!! Unbelievable…..
Benny
Benny,
I didn’t even get an exact ammount mate. I fell over just at the estimated amount. They told me that they can give me an exact payout figure how ever it is worked out off of a complex equation apparently.
With the estimate alone I was sure that I don’t have enough cash savings to make it worth my while to break the loan and restructure to include an offset… I am all of a sudden very happy to wait another 12 months and save cash to deposit into the account at that stage
Cheers
12 months is a pretty short timeframe (eg when compared to a 30 year mortgage) plus in Australia you can get pretty reasonable rates for 6 month CD’s etc (well compared to here in the USA where its literally 0.1% for most deposits).
Put the money aside in an account (eg don’t leave with general savings where it will get spent….) and in no time you’ll be ready to pay down a big chunk.
You must be logged in to reply to this topic. If you don't have an account, you can register here.
