Advice on refinancing to an interest-only home loan in Australia? (with some complications)

September 13, 2009 8:56 AM

Advice on refinancing to an interest-only home loan in Australia? (with some complications)

I currently own a house which is now mortgaged to the tune of $350k. Because I was working as a freelance fund manager with a less-than-reliable income when I first bought the house, the banks would not lend me anything. So I borrowed from a relative. Everything was fine until the credit crunch wiped out my (and my clients') portfolios. Since then I have only been able to pay my relative back the interest on that loan.

But now, for his own reasons, my relative needs to have that principal back. I'd like very much to oblige him, and am wondering if this is possible without selling the house, into which I have sunk a lot of time and money in renovations.

The complication is that one of my ex-clients is now taking steps to possibly sue me, essentially for losing her money. I have breached no contract and did what I could with the market the way it was, but my barrister tells me that the legal process will be a long and tedious one, and that things are still very much in the air. My feeling is that these sorts of cases will not result in clear-cut settlements, and that even in the best of cases I will be up for some hefty legal fees.

The good news is that I now have a stable, well paying job with a large international company. I have clean credit history and the kids are financially independent at least on paper, so I'm confident the banks will be happier with me now.

What would be ideal is if I could take out a 15 year interest-only loan, pay back my relative now, and essentially go on as I have now until I'm recovered. But if my ex-client does serve me papers, will that make it impossible again to apply for a loan? Of course, I will not apply for a loan if it looks like I would not be able to pay it off after the 15 years, but even if things turn sour and I am obliged to pay compensation, I think that by that time the case is concluded I will be back on my feet and able to cover both.

What are my options as far as refinancing goes? Do you have any recommendations for specific brokerage houses, or any other advice on my situation?

Thank you in advance. Just in case, I can be reached at: [e-mail]

posted by anonymous to work & money (3 comments total)

Interest only is for saps. You say you have a job? Get a home equity loan if you can. Dump everything you can into it. Salary, bonuses, spare change. Don't get me wrong, equity loans are also for saps who usually don't know what they're getting into but you really need the ability to draw on large amounts of money quickly in the medium term. Interest only makes a loan look really cheap but you don't get anywhere and lose your discipline quickly. Also, home equity loans reduce your interest as you dump more and more money into them which will keep future costs down.

Immediately start to build equity for when you start getting clobbered by legal bills and need cash for a settlement. You should have enough squirreled away and with any luck be able to pay out any crap headed your way.

One thing though. This only works if you're disciplined. Resist the urge to use your home like an ATM or forever be doomed to follow the path of so many forclosures that have fallen before you.
posted by Talez at 3:08 PM on September 13

By my reading of your story your "mortgage" is between you and your relative, no bank is involved in it. Is there even a contract between you?

You really need a lawyer to work out what the situation between you and your relative is. Actually you and your relative need your own lawyers, even if you're both intending to resolve the matter amicably - for one lawyer to serve you both would likely be a conflict of interest. Once that's sorted out, you'll know what to tell the bank.

As I see it (IANAL) there are three good outcomes for you and your relative: (1) there is absolutely no legal obligation for you to pay the loan back, in which case the bank will welcome you with open claws; (2) you have a legal debt to your relative which is unsecured by the house, in which case the bank will treat you as if you own the house outright and your debt the same as any other personal loans you might have had (note that a personal loan for $350K does not necessarily look good, but a history of payments on that loan it and an intention to consolidate it through the bank using the house as collateral, probably does); (3) your relative has a legal mortgage against your house just as if he/she were a bank, and you're basically refinancing from one "mortgage provider" to another.
posted by aeschenkarnos at 11:39 PM on September 13

As another data point, Australian banks will typically only do 5 year interest only terms, requiring you to reapply after that period.

Effectively, the loan you want is to pay out a personal debt, with the house as security. It's not "standard", so you'll have to jump through a few hoops.

Most majors are also requiring a 5% genuine savings history (i.e. deposit history) - do you have this?

I would engage a mortgage broker who can shop your situation around and see who'll bite.
posted by dave99 at 2:16 AM on September 14