FOR those who appreciate lateral thinking, you’ll just love this.
Tim is a surgeon and loves the Commonwealth Bank. He knows very well that both his loans could be cheaper, especially his investment property loan, as that interest rate was hiked with the whole APRA thing last year.
We discussed switching his loans to St George Bank, mainly for their market-leading, two-year investment rate of 3.89 per cent, collecting two $1,500 refinance rebates (to get two, we need to make his wife the primary applicant on one of the loans).
But Tim’s reluctant to switch banks because staying at CBA is just so convenient – the outstanding balance of his Qantas Mastercard sweeps from his offset every 55 days as it should; his daughters account is also offsetting, and he’s had it for years like this (cool set-up, I did it of course).
His Practice Trust is also linked. Anyway, refinancing doesn’t tickle his fancy, even if it saved him a few grand each year.
We quickly explained to Tim how he can get ahead, without changing banks. The strategy exploits the fact that a couple of banks will apply their ‘owneroccupied’ interest rate to Tim’s investment loan, as long as his owner-occupied property is offered as security (hardly anyone knows this, but now you do, as well as those you now tell).
Of course, what makes a loan tax deductible is purely its original purpose.
We refinanced his investment loan, using his home as the security. With a lifetime package discount of 2.08 per cent, he gets his investment loan at 3.59 per cent.
We left his small home loan at CBA, which is on 3.90 per cent, but substituted the security, so this home loan is now secured by his investment property.
This loan remains at the ‘owner-occupied’ rate, since CBA (and most other banks) classify and price loans based on ‘purpose’, rather than which property is used as the security.
So now Tim has saved a whopping 1.20 per cent on his $1.2m investment loan, so he’s better off by $14,400 per annum. Whack.
And he still gets to conveniently use his CBA offset, which is still attached to his home loan, which hasn’t moved. ‘Home Investment Loan Replacement Strategy’… proudly invented by iChoice 🙂
Interestingly, Tim does have the option of switching his home loan as well to 3.59 per cent and because he has enough equity in it, we can leave the investment property liquid (unencumbered).
I reckon for the purpose of asset protection there’s no need for anyone to offer the banks more collateral than they need. What I also know is, the minute Tina and I eventually finish the construction of our new home, we’ll be refinancing our investment loans (and commercial loan) to 3.59 per cent … will save us a bomb.
Hey I’m a 47-year-old conservative banker, I need change management therapy as much as the next bloke – but dollars is dollars.