Time To Refinance
Sun Herald
Sunday February 25, 1996
* SIX years ago we borrowed $110,000 to buy a $120,000 house through Homefund. We started on a low start loan so our balance soon ballooned to $123,000. We tried to refinance but there was not enough equity in the house and we could not sell without owing money.
When Homefund collapsed two years ago we were offered rescue package B. This worked out that our repayments would be set at 30pc of our gross wage. As I was about to leave work to have a baby we took up this package. We are finding it hard to keep up the repayments on just one wage as my husband's overtime is included when determining what amount the repayments should be set at. If I returned to work our repayments would only rise again. We are paying more than $1,200 per month and only $100 a month is coming off the balance of the loan which means we still owe a little over $120,000. Should we sell and cut our losses? When both working we have a combined income of $67,000. The house is worth about $130,000.
J S, St Clair
THE Homefund fiasco quietened down after the State Government allowed all 23,000 or so remaining borrowers to restructure their loan in one of four categories without penalty.
Most fell into category A and could afford to refinance elsewhere, so only some 12,000 remain with Homefund.
The 7,000 in Category B were able to repay with some Government help and were offered a new income geared loan which was reviewed each year and their repayments were set as a percentage of income.
The minimum interest rate that they would have to pay for the first 10 years would be 5.75pc. But on low start loans, you were judged to repay at 30pc of income and the interest rate that was artificially established by this first year's rate of repayment became your minimum rate for the first 10 years. The maximum rate was the original interest rate when you first took out the loan and could be around 14pc.
Category C were those who could not repay the loans even at 5.75pc. The Government offered to buy the property and lease it back, with a forgiveness of debt if the value was less than the loan. Category D were people in default and they were either given temporary relief or the property was recovered.
The restructured Homefund is now handled through the Home Purchasing Assistance Authority (ph 1800 806 653) in conjunction with the Cooperative Housing Societies. that originally distributed Homefund, although a lot of these have merged.
Your low start loan would have seen your minimum rate set at the rate established in the first year of your restructured loan when you paid 30pc of your salary. This appears to have set your minimum interest rate at 12pc, which is well above the standard mortgage rate.
The only reason for you not to have refinanced earlier was that the value of the house was less than the loan.
This appears to have reversed since your loan was restructured and the loan now constitutes 92pc of your home's value. You should be able to now refinance but will probably have to pay mortgage insurance.
Move quickly as I suspect that in a few months honeymoon rates with the banks may disappear. You may do even better to take a two-year fixed rate at 8.95pc. Set the loan repayments as if the interest was at a 10pc rate to give you some fat as interest rates rise in coming years, while still reducing your repayments by about $40 a week or $2,000 a year. Stay in the house as I expect property prices to rise in the next two or three years.
SHARES VERSUS BONDS
MY wife invested $22,000 in NRMA savings bonds (managed units) on October 2, 1991. These are valued at about $29,000. She is on an annual wage of $27,300. This would put her in a lower tax bracket than the 36pc tax paid by NRMA on these bonds. Should she withdraw the bonds and claim a tax rebate on the investment earnings and then invest the proceeds in shares paying franked dividends?
P R A, Westmead
INSURANCE bonds pay 39pc tax - a higher rate than the average person.
Your wife's average tax is around 21c in the dollar.
If she withdraws before the first eight years, she will be fully taxed on the profits, and receive a rebate 39pc. It is often best to withdraw before the eighth year is up or if a high income earner wants to continue the bond, to add more to it and start the 10 years again.
The NRMA fund has returned about 10pc after tax in the past 12 months, which is not bad.
The tax effect of buying stocks paying franked dividends is in your favour, though I expect a fall in share prices in coming weeks.
© 1996 Sun Herald