Refinancing between Banks

Someone asked me recently about their mortgage and I was stumped. After looking into it I couldn't locate any information on it so hopefully there's someone with experience or knowledge who can help.

When refinancing with a bank and drawing out more funds what happens if the additional funds aren't actually spent?

As an eg. if the banks told money is needed to buy a car (not sure if this is valid to begin with) on top of the refinancing and they approve the refinancing with the additional amount borrowed for the car.

Would they care, take the money back etc?

Comments

  • Depends on the mortgage contract. Probably best to speak to a solicitor.

    • i didn't neg you but that seems a bit much for something like this.

      • When dealing with contracts its always good to talk to a solicitor, if they purchased a car, if the car is collateral then that will carry on over to the new loan. It all depends on the contract.

  • +4 votes

    Usually the money simply appears in your nominated account and you are required to make repayments. If you are not going to use any of it, my suggestion would be to link it to an offset account. That way you would not be paying any interest on the undrawn borrowing. Good way to get ahead on your original mortgage too, because the repayment instalments are based on the total lending, but interest payment is based on the amount used net of any balance in the offset accounts.

  • Generally for most banks it just goes into your bank account at settlement as surplus cash from the refinance…. after that it’s up to you whether you spend it or just put it back onto the loan straight away. Some banks will require quotes at the time of application, e.g. if you are using additional funds for renovations, but others will just take your word for it.

    • Thanks. Yeh like I'm just worried about giving the wrong info but it seems to be like most things bank related there's no 1 standard process.

      • They ask for what you the surplus is for at application time. You have to be honest then, they might ask for evidence. If you change your mind later, after the loan is drawn, that's up to you.

  • If your loan has an offset account tied to it, most likely they will give you 2 loans and 2 offset accounts. 1 for the house and 1 for the additional fund. The offset account tied to the house will be empty and the one tied to the additional fund will have … fund in it.

    If it doesn't have an offset account, they will just give you a loan with your mortgage + additional fund. Then the actual money will be deposited into an account of your choice. Usually you nominate this account through a form.

    Bank wants to lend money and if the house you borrow against have equity in it then it make perfect sense to borrow against it to buy a car since mortgage carries the cheapest interest rate. And no, most of them will not ask for evidence.

    I refinanced and drew and extra 160k out of the house and just left it there. They didn't even ask me why.

    • what reason did you provide?

    • If you did this with an IP mortgage, then purchased a car or whatever, then you'd have a tax problem. Theoretically as I'm not sure how the ATO could ever know.

      • Tax is another whole kettle of fish.

        • Telling bank purpose of your mortgages is not connected to the purpose of the funds for tax purposes. For example if you buy a house to live in and get a 3 year fixed rate home loan product. Banks will offer you this product at a lower interest rate than an investment loan. Because you live in the property, and the funds are not used for income producing purposes, interest payments aren’t tax deductible. Now, if you move out after living in the property after a year, and rent it out, banks will not change the product category, not unless you go to them and ask for a review to say borrow more to buy another property. However, now the interest payments on the loan will be tax deductible, as the funds are being used to generate income.

          • @spal: Let’s just say I was an mortgage broker and experience working in an accountant company :p. Let’s just stick to OP question since tax purposes can get complicated.

  • If the additional funds were released to you at settlement, that means the bank was satisfied with the stated purpose for the funds. Whether or not you abide by what you told the bank is up to you, but from the bank's perspective they've asked the question and they're satisfied that you're not gun running to Iraq with the additional proceeds of settlement.