Switching Westpac Mortgage from Interest Only to Principle & Interest?

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  dcep on 10/07/2018 - 12:24

  i thought all IO will revert to P&I within a year or 2.

  • 

    thatonethere on 10/07/2018 - 16:03

    For owner occupied it will be harder to have IO. Except for small periods eg a construction loan.

    Investment properties will still have some option for IO but only if the bank likes the odds.

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  tighytighty on 10/07/2018 - 12:54

  +1

  In the current environment int only is always going to be more than p&i and yes this was mainly driven by apra regulations.

  • 

    uniqualz on 10/07/2018 - 13:02

    Thanks TT. So given the current situation, would you say there is no way interest only can financially compete anymore with P&I, given that P&I also deducts the principal every month?

    • 

      tighytighty on 11/07/2018 - 08:09

      +1

      In terms of int rate hard for IO to compete these days. Just the nature of the beast at the moment.

      However, if you have a fair bit of cash in your offset account which reduces your loan balance then you still might be better off with IO option. Need to work out the maths and see if it works for you.

      Also if your loan is your own home then I feel the P&I rate you have been given isnt great. You can do better than that.

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  HighAndDry on 10/07/2018 - 13:03

  +3

  Plus, never have I heard that Principle&Interest mortgages can be cheaper than interest only!

  As you said, it's not actually cheaper - you'll be paying 5x more. Cashflow wise, it's better for the bank. And the APRA angle sounds credible, even if there's no way to prove or disprove it. The recent banking royal commission has basically being cracking down on (amongst other things) banks giving out easy credit. Interest-only loans are exactly that, and moving it to a principle+interest loan ties into banks showing that the loans they have on their books are sustainable and not just churning the property market.

  • 

    uniqualz on 10/07/2018 - 17:40

    Good points! Thanks v much.

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  Chubbsmcfatflabs on 10/07/2018 - 13:11

  +1

  I'd suggest that the term has been increased..but its hard to comment without info on balance, and the overall term.

  • 

    uniqualz on 10/07/2018 - 17:42

    We currently owe the 20 year 500k mortgage, with 350k offsetting it. So only 150k outstanding balance, hence $600/month interest only payments we're making at 4.83%.

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  spal on 10/07/2018 - 13:29

  +5

  I would suggest that you refinance your home loan with Westpac or anyone else, and opt for P&I loan. Because you will be refinancing, it would be a new loan with a new 25 or 30 year term. Your P&I payments will be marginally higher than the interest only payments.

  In the current arrangement your repayments will be going up 5 times because, now you will be repaying the principle amount within a shorter term period. Say for example your original loan was for 30 year interest only term. At the end of the loan term you would be required to repay the loan by either refinancing or selling the asset and paying from the sale proceeds.

  Now, if you opt to P&I loan, you will be paying the loan amount over next 15 or 20 years (depending on the balance of the term of your loan). If you refinance, the loan term is reset to say 30 year. So, you will be able to get access to cheaper interest rate on P&I loans and still have affordable loan repayments. I hope it makes sense.

  • 

    vinni9284 on 10/07/2018 - 16:38

    +1

    If you refinance, the loan term is reset to say 30 year

    The OP can refinance and change the duration of the loan. From 30 years back to their current duration. However this will affect the repayment amount if they can afford as it will climb.
    … and yes .. Westpac supports this change

    In Excel. = PMT()
    https://support.office.com/en-us/article/pmt-function-0214da…

    Cheers

    • 

      uniqualz on 10/07/2018 - 17:49

      Awesome Vinni.. just let me edu-mer-cate myself a bit on what the hell that all means and I'll be right with you. I could be gone a while.. 😅

  • 

    uniqualz on 10/07/2018 - 17:46

    That does make sense, thanks a lot Spal. In other words, don't just switch the current loan to P&I, but remortgage entirely from scratch to P&I. That's the gist?

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  Helmuth on 10/07/2018 - 15:04

  Not sure that it's easy to get good principles from banks. I'm sure they're willing for you to pay back the Principal owing on your loan though.

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  pantsparty on 10/07/2018 - 15:06

  +1

  Is this an investment property, or do you live in it? 4.24% doesn't sound like a very competitive rate compared to whats in the market at the moment. Might be time to refinance!

  • 

    uniqualz on 10/07/2018 - 17:39

    It's defo a PPR property. We've lived in it from the start.

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  Sofie519 on 10/07/2018 - 21:53

  +1

  It seems it has been a while since you reviewed your loan and the market. With the added regulations, in general it is pretty difficult to get IO for a PPOR and under exceptional circumstances it's approved for 2 - 5yrs only IO then reverts to P&I for remainder of the term.

  With the trends of low rates in the past few years, IO rates have in general, been higher than OO. So unless U have no intention of paying down your loan, (some people don't) you should start looking into P&I. You may also need to consider you might not be eligible for a loan when your IO reverts in 2038 (e.g. retirement, change in income, other changes including but not limited to regulatory changes).

  Having said all of that, Westpacs offer to you for P&I in a PPOR is not entirely competitive with many lenders offering rates from 3.5%.

  Provided you are eligible and don't mind some hassles in refinancing, roughly 3.58% would get U one with an offset account. It's true U will end up paying about $2300 per month. But with the $350k offset most of the repayment would be towards the principal. So by about 2034 you would have actually paid off your loan rather than still having 500k owing under our current arrangement.

  Another option if you want to keep low repayments of course, is to put your $350k into the home and just borrow $150k then you'll be looking at approx $680 per month repayment p&i ..

  Regardless whether you choose to store your asset in cash or equity, it's still your asset. You might have liquidity concerns as equity would be harder to access, so you might lend a bit more than $150k for a cash buffer.

  All depends on what plans and intentions you have, just know options are available.

  • 

    uniqualz on 11/07/2018 - 13:55

    Thanks v much Sofie!

    "Another option if you want to keep low repayments of course, is to put your $350k into the home and just borrow $150k then you'll be looking at approx $680 per month repayment p&i .." - I presumed having the offset was the same thing, without actually committing the 350k to the bank in my current case.. but not the same thing?

    • 

      Sofie519 on 11/07/2018 - 21:47

      Your minimum monthly repayment is based on loan amount, interest and term. Offset account offsets the interest, so having a 500k P&I facility with a 350k offset, you will still be debited approx $2300pm, but more of that goes towards paying down the principle, since you are only charged interest on 150k. That's why you can pay it off sooner (approx 16yrs) rather than taking the full 30yrs of the loan term.

      In your current IO scenario, you are paying $600 because you are paying interest on 150k despite having 500k loan.

      So you don't need to think that P&I immediately quadruples your repayment, just refinance to a loan you are comfortable with repayments on, e.g 150k 250k etc (yes~ it does mean you will use some of your cash to pay off the Westpac 500k balance).

      But again it all depends on what plans you have for the future.

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  Gandalf the Thrifty on 11/07/2018 - 08:24

  +4

  Not sure about IO on PPR but for P&I, find good rate elsewhere (~3.5%) then ring up westpac and ask for your mortgage discharge form.
  They'll ask you why and say you can get better from X. As you've been with them for years they should put you through to loan retention team, who can magically offer you much better rates to stay, than the normal call centre person who won't give a hoot.

  • 

    uniqualz on 11/07/2018 - 13:48

    Brilliant, thanks GTT. Do these 3.5% P&I low interest rates last for 20 or so years though (market dependent of course), or do banks offer them for the first 2 or 3 years then revert you to a much higher rate anyway?

    • 

      Gandalf the Thrifty on 11/07/2018 - 17:10

      Rates will still move with RBA/banks increases but should be a permanent reduction for life of loan over bank's advertised rate. I'm currently at my banks 'new loan only' rate.

      If your loan rate ends up worse than others over time, you just repeat the process and if won't budge then you actually move to another lender (checking cost etc involved vs staying)

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  FiDad on 11/07/2018 - 14:45

  Another important thing to consider is that is there an intention to make this PPOR to investment property one day in future? In that case having an IO loan makes more sense since once I start paying down the loan with P & I, I won't be able to claim deduction on already paid off principal amount once i convert it to IP. I am in a similar boat with you although my rate is 4.22% with AMP. AMP already tried to get me to move to P&I last year with few incentives like better rate and waivers of some fees and I am expecting a bigger push next year

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  drup on 12/07/2018 - 08:37

  How much are you paying for that premier package?there are banks that will offer you just as low for IO as westpac P&i and you don't even need to pay a annual package fee. Offset as well.

  Is the property an investment or ppr?

  • 

    Sofie519 on 12/07/2018 - 13:33

    Seems like OP has a pre-NCCP loan where he has a 30yr IO (until 2038) PPOR. Yes he can get cheaper IO if he refinances, but current offers for PPOR will be limited to 5 years and only under escalation with Lender with reason.

    So depending on what the OP wants to achieve:
    1. Eventually pay off the loan, then can consider refinancing and switching to P&I
    2. No intention of paying off the loan, (cheap rent for next 20yrs but still enjoy tax free equity gains) then keep your current facility.