Thursday 12 January 2023

$1MM home loan conditionally approved

The bank finally approved (with conditions) my investment property home loan application. The loan amount will be $1MM (the full 'purchase price') of which $900K will be used for settlement and the remaining $100K use to clear and close some existing liabilities (our remaining home loan and associated portfolio loan). The conditions that have to be met by the settlement date are mostly to reduce my existing credit lines on various credit cards and the Citibank 'redicredit' unsecured personal loan 'line of credit' by a total of about $120K. I'm currently in the process of closing the an credit card account (that has a $27K credit limit) and reducing the balance outstanding on my 'redicredit' account from $60K to $30K (which is a bit of a pity, as it has a fixed interest rate of 2.9% until May 2025). I also have to reduce the credit limit on a couple of my credit cards from around $15K and $25K to 'only' $2K and $3K (as the bank credit risk calculation assumes you have to service payments on the entire credit limit at the exorbitant 19% interest rate that would apply if you didn't pay the credit card balance in full each month).

After settlement I will basically only have the single $1MM mortgage (at around 5.39% interest) as outstanding debt, plus $30K on the redicredit account (at 2.9% interest) due to be paid of in May 2025, and a couple of credit cards with low credit limits for everyday spend (that is paid off in full each month).

The vendor is scheduling valuation appointments during the coming week, so I should also find out the current valuation for the apartment from the bank in due course (I expect it to be somewhere in the vicinity of $1.3MM). The valuation of our home was already done last week and came in about $100K lower than my monthly estimated valuation. The report noted that some 'deferred maintenance' had affected the valuation, so if we were going to sell our home we would fix up any minor and cosmetic issues which would probably bring the market value closer to my monthly estimated figure.

Aside from the risk of not being able to let the apartment for the expected rental (or having lengthy periods of vacancy) my biggest concern (aside from if I lost my job) would be if the mortgage interest rate rose significantly. Every 0.25% hike in the overnight cash rate set by the RBA is likely to be passed on as a 0.25% increase in the variable mortgage interest rate, and on a $1MM loan that would translate into an additional $48 per week in interest. Hopefully inflation might start to moderate early in 2023. It appears to have already peaked in the US, but the Australian monthly data isn't showing a similar dip as yet.

Subscribe to Enough Wealth. Copyright 2006-2023

No comments: