- August 24, 2023
- Posted by: legaleseblogger
- Category: Related News
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Title: Seeking Advice on Using Cash Proceeds from Rental Property Sale
Introduction
Hi there,
I hope you’re doing well. I have a financial dilemma and would greatly appreciate your input. Math and assessing the pros and cons of financial decisions are not my strong suits, so I’m seeking some guidance.
Background
Currently, we are in the process of selling our rental property. We have offered our tenants the first opportunity to purchase it, and we’re hopeful that they will take advantage of this option. After accounting for associated fees and expenses, we are expecting to have approximately $150k in cash from the sale.
Deliberation: Paying off Existing Mortgage
Here’s where I need your help. I am considering using this cash to pay off a mortgage on our primary residence, which currently amounts to $380k and carries an interest rate of 5.7%. The big question is whether I should pay off this mortgage immediately or wait until December when the fixed term comes to an end.
My Understanding
Based on my limited understanding, it seems logical to put the rental property sale proceeds towards the mortgage right away. By doing so, we would likely reduce our overall debt burden and potentially save on future interest payments. However, I am open to alternative suggestions and would love to hear your thoughts and ideas.
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Conclusion
To summarize, we have a significant cash sum from the sale of our rental property, and I’m torn between paying off our existing mortgage immediately or waiting until its fixed term expires in December. Your input and suggestions on how to proceed would be greatly appreciated. Additionally, utilizing tools like AI Legalese Decoder could enhance our understanding of the pertinent legal aspects involved. Thank you in advance for your support.
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I’d do a little spreadsheet showing me the amount I’d earn if I put the $150k into a term deposit for the length of time your mortgage remains. Then calculate the amount of interest you’d pay letting it run.
2 points to consider
– taxes on interest income
– since 150k doesn’t cover your mortgage you’ll be refixing at more like 6.5% so I’d factor in the higher rate I land on.
Then pick the option which leaves you with more $$$
Ring you bank and ask them what break fees are. We just did this and no break fees as we’re moving to a higher interest rate. So you have to do the maths on 4 months lower rate vs 4 months less overall interest.
I had a similar calculation. My bank volunteered to do the calculation for me and show the two options.
I’m going to ignore your original question as I feel it’s been well answered…
At the risk of being rude, can I ask your motivation for selling your rental?
If it’s because you’re feeling over leveraged at the moment and need to reduce mortgage repayments, fair, but whenever you decide to break the mortgage on your own home, could you put the money in an offset account?
This would keep the money accessable to you should you decide in the future to get another IP, or if/when interest rates do come down, it’d give you the chance to invest elsewhere and maintain a bit of leverage on the house when that occurs.
Of course, if your goal is to simply decrease your debt burden, then by all means go ahead with that, too!
To understand this better we’d need to know the following information:
* Time left on your 5.7% term
* Your repayment frequency currently (e.g. fortnightly, monthly)
* Your repayment term (e.g. 15, 20, 25, 30 years)
* The maximum you can afford for mortgage
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If I assume that you have 5.7% fixed for 2 years…
**Current Mortgage:**
Initial Mortgage Amount: $380,000
Interest Rate: 5.7%
**New Mortgage Rate:**
Interest Rate: 6.99% (from ANZ, 2 year term)
Remaining Balance: $230,000 (after paying $150,000)
To calculate the interest costs for both scenarios, I’ll assume the remaining term of the mortgage is 2 years.
**Current Mortgage Interest Cost:**
Using the formula for calculating simple interest:
Interest = Principal × Rate × Time
Interest = $230,000 × 0.057 × 2 = $26,220
**New Mortgage Interest Cost:**
Interest = $230,000 × 0.0699 × 2 = $32,034
**Interest Difference:**
Interest Savings = Current Mortgage Interest Cost – New Mortgage Interest Cost
Interest Savings = $26,220 – $32,034 = **-$5,814**
In this calculation, you’ll notice that the new mortgage at the higher interest rate would result in higher interest costs over the remaining term compared to sticking with the current mortgage. So from a pure interest cost perspective, it might not be financially advantageous to break the current mortgage and pay down $150,000.
However, it’s important to note that this calculation does not take into account potential breakage costs or the impact of paying down a substantial portion of your mortgage principal. Additionally, future interest rate trends and your personal financial goals should also be considered in making this decision.
​
If it were me, I’d go and talk to a broker and see what options were available. Not only will they get you a better interest rate from a bank, they’ll also help you structure your finance to best suit your needs.
Is there an option to offset it on your current mortgage?
I recently paid a lump sum towards my mortgage without having to break and re-fix, with Westpac
Obviously you’ll have to check with your bank/agreement, but we can make a lump sum payment of up to 5% a year without penalty.
So do that immediately, then put the remainder in a savings account (and make sure to meet conditions for premium interest) and wait until December. At which point I’d probably go for revolving credit/offset mortgage.
Call the bank today and get a quote on if there are fees. When mortgage rates go up, there are generally no break / early repayment fees.
You will likely be able to pay the $150k AND keep your current rate, which will be a lovely little win.
We have been chipping away nicely for the last 18 months because of this
Would you have to “break” the mortgage. Most banks will let you pay off additional capital at no extra cost when current interest rates are higher than when you took out the fixed rate.
Personally, I’d pay it off, unless you think that you’re going to safely make 5.7% after tax right on an investment. December is really close anyway, so it doesn’t make a huge difference either way.
Call your bank and ask if there are break fees to simply do a lump sum reduction on the current fixed loan and say you intend to keep the same fixed rate until renewal.
As the Tennants haven’t agreed to it yet, I would assume it’s still 1-2months away from being settled . The difference would be negligible an probably not worth the stress to think about it. Let the bank know you want to put a lump sum down when you decide on the new rate to lock in
When we were paying off our mortgage earlier this year we didnÔÇÖt incur any break fees (and didnÔÇÖt have to refix or anything – we just made lump sum repayments – up to $50k at a time, sometimes just $5k, depending on how much spare cash we had – regularly until the whole thing was paid off). I think the logic was that our fixed rate was lower than the rates being offered by the bank, so they were all good with us chucking cash on the mortgage. This was with ANZ. I would call your bank and ask if they would charge you anything if you were to make a lump sum repayment of $150k. Hopefully they wonÔÇÖt charge you anything, and youÔÇÖll be able to keep your current rate until it expires.
Confirm the bank won’t charge you any fees, or will they hold your current rate until renewal time.
If you break now, what rate are you going from and to?
It may be financial better to put into TDP and earn interest less tax on difference if mortgage at a much lower rate than the new rate would be, after factoring in tax too.
E.g. if you’re currently on say 3%, and the new rate would be 7% then 4 months at 4% higher versus paying 3, but earning say 4% on a tdp less tax may be better for your number.
Lots of variables.
Mortgages are generally considered cheap credit. With a mortgage so low, I wouldn’t even be considering paying it off that.
But you should get qualified financial advice.
It’s probably best to break it (will be free) and pay the additional now. You’ll be refixing at a higher rate, but they are likely to be higher again by Dec the way the economic data is tracking.
However, it’s all guesswork and no one really knows.
You should never be asking the internet for financial advice. You should ask your bank or ask an AFA (accredited financial advisor)
They will most likely give you a range of scenarios and what you will save or pay up for each then you can decide which is best for you.
Everyone is different and has different goals. Mine was to repay my debt asap but that was me.
Unless the mortgage is with another bank you won’t have an option. The bank will dictate what they will do with the money which will most likely be pay down your mortgages.