[Ruffles]

Hi all,

I'm just throwing around some ideas at the moment, and think this might work!!!

We are planning to demolish/rebuild our house. Have already investigated the options of selling and rebuying etc, and staying where we are is the best financial option for us.

We also have 2 kids in private school, and not a lot of future savings. And I will recieve a substantial inheritance in the future. Don't like to think about it much. But the reality when your parents are in their 80's make it a "when", not an "if". (So whatever we do now will not be indefinite.

Our borrowing capacity is over $1 mill (absolutely rediculous!!!) so we have the money to "service" whatever we do.

OK - so what I'm thinking is:

We borrow enough to rebuild a new house, plus enough to cover the next 5 years of school fees. The school fees money is left in the account (so we don't pay interest on it?) and used as necessary.

In the meantime we would also be making extra payments, which will also add up towards future school fees etc. (Kids will be at school for another 10 years almost).

I suppose I see the school fees money as a safety net/security thing. Is that strange?

Is it true that if we don't use the money, we don't pay interest?

What am I missing? What are the pro's and con's of doing this? Or is it just a strange way to go about it? We could afford to jsut save the school fees, I suppose. But the idea of having 5 years put away in the bank in advance, to redraw as we need it, just feels more comfortable to me. Then any savings as my pay increases in the future etc will go towards the next 5 years - and fee increases.

(As I said, obviously eventually I will have enough money to pay it all out and be debt free. )

WDYT? How would you do it?

[Mozzie1]

I'm not sure why you want to do this - is it because it will give you a false sense of "savings"? Just be careful that you don't end up spending more money because you feel like you have cash sitting in the bank.

If you have the money sitting in an offset account, then you won't pay interest on it. You will have higher minimum repayments, because the loan amount will be higher.

As for whether the bank will let you - I'm not sure, but I imagine it will depend on how much the property is worth, and how much you want to borrow in total. If you are only borrowing 60% of its value, they might. If you want to borrow 110% of its value (including the school fees), you have buckleys.

Also, an inheritance isn't ever guaranteed - I wouldn't be banking on it.

[~She~]

I guess it depends on your loan setup but as far I understand from our own borrowing you are right that you only pay interest on what you spend. I can't see a bank taking much confidence in the whole inheritance as security though, that's the only thing I would be concerned about.

I have one child in private school and another that will start in a couple of years time so I can see the merit in your forward planning there, I wish we were in a position to begin my savings plan for education right now rather than it be something budgeted when the time comes. It would also afford you a lot more freedom yearly from your income.

We are halfway through a renovation project on a house that I just can't fall in love with, but love our location and would love to demolish and start again myself so I say if you can. then go for it

[Bacongirl]

I don't know about the 'not paying interest part'. Unless you are talking about nit drawing down the full amount if the loan? In this case I don't think think the money is there indefinitely, you have to draw it down in X amount of time of the bank takes back the offer.

My understanding is if you did take all the money and park the school fees in an offset account, you would still pay interest based on the total amount borrowed, then the amount sitting in the offset account would be used to lower the interest paid, but I think you'd be worse off based on current rates.

Either way you are putting yourself in more debt to the bank. You said you could save the money yourself? Then I would be doing this and putting the savings in an offset account, so it worked agains the money borrowed for the new build, but was still available when you needed it to pay fees.

[Ruffles]

As for whether the bank will let you - I'm not sure, but I imagine it will depend on how much the property is worth, and how much you want to borrow in total. If you are only borrowing 60% of its value, they might. If you want to borrow 110% of its value (including the school fees), you have buckleys.

Also, an inheritance isn't ever guaranteed - I wouldn't be banking on it.

The full amount borrowed would be about 60% of the finished house value..... (new houses in our area are around $1.2 mil. We would be wanting about $700 000 all up).

As to the inheritance, we wouldn't be putting that forward as security. But it is guaranteed in as much as my parents are very upfront with my brother and I as to who is getting what when they go. They are forward planners! (down to individual jewellery pieces etc). They have quite a few properties to be split between the two of us.

Another option which have used in the past is to use one of their properties as security, but I am thinking with our current equity we shouldn't need to.

Either way you are putting yourself in more debt to the bank. You said you could save the money yourself? Then I would be doing this and putting the savings in an offset account, so it worked agains the money borrowed for the new build, but was still available when you needed it to pay fees

Thanks coffee girl. And your other points are what I was wondering too. I think this sounds like the logical way to go. But I do like the plan of having it there "just in case". And anything we add is a bonus for the future years beyond the initial 5.

It would also afford you a lot more freedom yearly from your income

.

I htiknk this is the attraction. I know we can live comfortably(not extravagantly, jsut not "on the edge" as we have in the past), and it reduces my stress for the future.

This post has been edited by Ruffles: 14/01/2013, 05:09 PM

[Mozzie1]

My understanding is if you did take all the money and park the school fees in an offset account, you would still pay interest based on the total amount borrowed, then the amount sitting in the offset account would be used to lower the interest paid, but I think you'd be worse off based on current rates.

Most mortgage offset accounts these days are 100% offset - so you don't pay any interest on the money that has been borrowed, then dumped straight into the offset account. We kind of did this when we got our mortgage (only put up 20% desposit when we had more, so we effectively borrowed more than we needed to). It means that because of the higher minimum repayments, we will have our reggae completely paid off in 6 years.

[cinnabubble]

It means that because of the higher minimum repayments, we will have our reggae completely paid off in 6 years.

Tee hee.

[lsolaBella]

With my grandmother turning 94 (grandfather passes away the week before he turned 90) personally I would not be counting on inheritance soon. My MIL is 81. Still kicking strong.

[KT1978]

I wouldn't borrow extra, maybe a small redraw buffer only.

If you are saving for fees why do you need five years worth? Just save each week and pay each term. I liken what you are doing to buying bigger clothes, just makes it easier to put on weight because you have room!

How much is the land worth? Don't over capitalise on building. That's a big mortgage if prices go down and you need to sell. Inheiretence is never guaranteed and could be 15 years away.

[fancie]

OP, we knocked down-rebuilt 6 years ago.

The amount we borrowed was $35,000 more than the builder's contract for the rebuild. During the build, the builder would send us a completion of stage form which we would submit to the bank who would then release only those funds requested by the builder for that particular stage completion - for example: completion of the slab and framework, completion of the bricklaying and roof tiling etc.

Once the last of the stage completion requests had been paid to the builder (after handover of the house to us) were the additional funds deposited to our account.

Don't know whether this applies to our bank and loan conditions or all banks. I would be very doubtful that the bank would release the funds to you prior to the build as they do not want you to do a runner with the money when they hold the mortgage over the block of land AND the added value of the future dwelling.