Fixed rates
I have a $350,000 fixed loan for another three years at 8.29%. Is there a way to get out of this fixed interestonly loan without paying the huge payout fee?
Thank you kindly, Sonja.

Hi Sonja,
This is a common problem for many borrowers who chose to fix the interest rate on their loan when rates were high. Fixed rates attract higher break costs than regular standard variable rates and these break costs can end up being in the tens of thousands of dollars.

Whenever you fix the rate on your loan, you are betting against the market. You are confident that the rate that you have fixed in at will not go above the standard variable rate – and sometimes this is the case. But in recent times with the effects of the global credit crunch forcing rates down – and very quickly I might add – many borrowers are in your position, and they just couldn’t see it coming.

Unfortunately, there is not a lot you can do. One possible way to reduce interest on your loan is to pay more off. Most fixed rate loans don’t allow extra repayments, but some do allow them in lump sums and others allow for more regular amounts.

First homebuyer
My wife and I have permanent jobs which are netting us $5,500 every month. We are interested in buying a property in regional Victoria (Kilmore). The house is worth $245,000 and is currently being built. We have spoken to our bank and it is only providing us 90% of the value of this property. This leaves us short by $24,500. We have savings of $7,000 and would be eligible for the First Home Owner Grant plus state grant plus regional area grant. Could you suggest any other possible way in which we can structure our loan so that we can cover this shortfall of $24,500 and thus get our foot into this property as soon as possible?
Thanks, Manu

Hi Manu,
Yes, unfortunately in rural areas you are restricted when it comes to the amount you can borrow. Now, the property purchase will cost approximately $254,000 in total funds to complete ($245,000 purchase price plus approximately $9,000 in stamp duty costs etc).

The loan amount on offer to you should be in the vicinity of $220,500 which means you require a total of $34,500 to complete.

With your $7,000 in savings, $14,000 First Home Owner Grant, $7,000 new home bonus from the Federal Government – plus the Victorian government provides an additional $3,000 bonus grant – and $2,000 for regional area purchase, your total available funds are $33,000 which means you need to realise an additional $1,500 to complete – minimum.

Keep in mind also that a loan of 90% will attract a lenders mortgage insurance (LMI) premium that can in most cases be added to the top of the loan. You will need to check with your lender as to whether this is the case with your property being located in a rural area.

With LMI and the shortfall of $1,500, one option may be to check with your lender as to whether they will accept a 'gift' of the balance of the costs from a family member – if that is an option for you.

Manu, also keep in mind that when purchasing your first home, there can be other costs that you won’t have budgeted for, like moving costs, insurance, and if it’s a new property, there may be essential things such as a clothesline, letter box, and other items that really add up. So please consider ALL the costs before you commit. Good luck!

I bought my first home two years ago now. One year into the loan, I decided to split the loan so now $100,000 is fixed for five years and $120,000 is variable. This property is in my name only and is worth about $450,000. Since then my partner and I have had a child and we have another one on the way. We want to purchase a larger home and turn our current home into an investment property.

I have been told that because the original loan was set up as owner-occupied I will need to refinance it to turn it into an investment loan, otherwise I will have tax problems when we try to claim the negative gearing benefits. Is this correct? We are concerned about the break costs if I need to refinance the fixed loan. (The fixed rate is very high now at 8.44% with still a long way to go.) We need to use both our incomes to service the new purchase.

How can we make it so that the maximum amount is borrowed against the investment (our current home)? Can we cross collateralise if one property is in just my name and the other is in both names or do both properties have to be in both names? If we do this will it cause break fees?

The current loan is portable so I was wondering if I could transfer it to the new purchase and then take out a separate loan against the investment property together with my partner. The new property will be around $500,000 and we would like to keep it below the 80%. Even if I were to just switch the security I would need to borrow more to finalise the purchase, which I couldn't do just on my income of $40,000. My partner is self-employed so doesn't show a very high income at $25,000.

Basically we need to know whether we can do this and stay good with the ATO and avoid break costs?
Very confused, sorry, Mary.

Hi Mary,
Yes I can see that you would be confused. The first step would probably be to sit down with a lending specialist and talk this through, as it is complicated and you need peace of mind on a way to move forward.

In the meantime, however, I will try and give you an outline of your options.

Firstly, you can change your loan from an owner-occupier loan to an investment without refinancing. You simply begin to claim expenses on the property from the first day it's rented. You may, however, wish to convert the loan to interest-only for tax purposes. Break costs will only occur if you wish to change lenders or convert to a variable rate before the fixed rate expires.

In terms of cross collateralising two properties – this is not an issue as long as you appear on the title of the new purchase as well. Again, use of a security does not attract any break costs unless you refinance the loan.

For tax deductibility, the ATO allows deductions based on what the funds were borrowed for and hence only the interest on the funds remaining on the investment property loan would be deductible. However, longer term, if your loans are set up well with offset accounts, this can be avoided. Alternately, it may be worth selling the existing house, transferring the new security to the existing loan and then using the equity to purchase a new investment property.

Now all this being said, for any scenario to work, you need to ensure that your ability to service any existing and new debt is satisfactory. You have a reasonable amount of equity in your current property, and it may be tempting to maximise that equity – but with a growing family you need to be prudent when it comes to the amount you borrow.

Mary, you need the advice and support of a solicitor and accountant before you make any move, and don’t forget to ask about any capital gains tax implications before you make the final decision.