Monday, April 30, 2012

The Catch with UBank's Home Loan UHomeLoan

UBank's UHomeLoan has been offering one of the lowest interest rates that I have seen from a subsidiary of a Big Four Bank. At 6.59% with a possible 0.2% discount for loyalty, and then even the possibility of getting $500 back if you are already a UBank customer, it took me quite a while to understand why the whole nation was not refinancing with UBank.

Who's UBank?

First of all, one major reason from talking with friends is that people are afraid of signing up to UBank because they practically never heard of it. It's only when you mention to them that it is a part of the National Australia Bank that they feel a little more at ease.

All Online (Skype even)

The second thing is that everything is online. For someone who is pretty savvy with the internet, this is definitely not a negative point for me. On the contrary, I prefer dealing with the internet than some customer "service" officers in a bank.

So what if there's no offset?

The third point is the technical point that many newbies like myself may not know. It involves negative gearing which is a big issue since one in seven taxpayers in Australia are property investors, according to the ATO. The problem is, UHomeloan does not have an offset account. Apparently if you start with a home loan of $250,000 and you pay it down to $100,000 for example, and then you buy another house with the intention of using the current house as an investment property, it may not be good for tax purposes to have no offset account. This is how it was explained...

House 1 becomes your investment property so because you can claim tax deduction on your interest rate repayments, you want to be paying MOST of your interest on this property since it is tax deductable. However, when you take out, say, $80,000 from your existing loan to buy House 2, the ATO may not like this because in some ways, your interest repayment is inflated on House 1. You were down to paying interest on only $100,000 but when you claim your tax deduction, its now based on ($100,000+$80,000 =) $180,000. This is obviously not financial advice and I have kept this explanation quite general to reflect that but basically, when you have an offset account, you wouldn't have this problem. If you are not planning to leapfrog from one property to another in the future, then you wouldn't have a problem with UBank not having an offset account. So I finally worked out what you could say is the "catch" behind a very good deal.

Other posts on UBank 


Anonymous said...

Uhomeloan has a redraw facility, so the extra amount can be withdrawn anytime. So it does not matter whether there is an offset facility or not.

Me said...

yeah i should have mentioned that but my point was that although there is a redraw facility, if people are going to make the house an investment property, they may not be able to maximize their negative gearing after paying down the loan.

Anonymous said...

Not really sure how having an offset account would help if you were buying multiple properties for investment.

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