Tagged: loan early payout
21/04/2019 at 9:03 pm #37134
I am in a medium sized strata building in NSW which, surprise/surprise, had a large amount of building defects requiring repair. With no chance of getting any money from the developers, the OC took out a huge loan at an interest rate of around 8.5%.
The building defects were completed around early last year, and the contractors paid.
As it is clear now how much is outstanding, and no further calls will be made on this loan, I would like to look at paying out my portion of the loan. I see this action as not only helping me, as I would not have to pay the interest, but would also assist the other owners as the loan would be repaid quicker. In addition, there may be other owners in a similar situation to myself who would rather not pay the very high interest rate on the outstanding amount.
I understand that the loan hasn’t been taken out in the name of individual owners, but I can’t see that that would mean I couldn’t repay my portion in advance. After all, I would think I could pay my levies in advance if I so desired and the loan is apportioned similarly to that on unit entitlements.
Your advice would be appreciated.21/04/2019 at 10:20 pm #37136
Your strata loan was taken out on behalf of the strata scheme as an entity so you, as a Lot owner, would probably not independently be able to opt out of the loan and repay your portion.
Some strata loans do not require early repayment fees. Check whether yours does.
The strata loan forms part of your levies. I personally have not heard of an owner having the ability to pay out their part of the loan as working out the differentiated levies would then be a problem.
The only solution is to submit a motion to the committee and the strata manager to include at the next general meeting that seeks to have the Lot Owners vote to have the strata loan repaid and wound up. Your scheme may need to raise a special levy to repay the loan and this too would need a motion and a vote.
Below is an extract from the Macquarie web site. Your loan may not be from Macquarie so it is best to seek answers directly from your strata loan provider.
- There are no penalties for early repayment, except if the Strata Plan wants to repay a loan that has a fixed interest rate
- In that circumstance, the Bank would need to determine the fixed rate break costs (which depends upon a number of factors, including time to expiry and interest rate levels).
- The owners should keep in mind that these loans are not redrawable, so any principal paid early cannot be accessed at a later time – they would need to apply for additional funding.
Lannock have a similar response to whether an early re-payment can be made:
“Yes. Generally there are no penalties for early repayment, however, if you have taken an Advance at a fixed rate, then break costs may apply for that Advance.”
22/04/2019 at 10:11 am #37139
- This reply was modified 4 weeks, 1 day ago by Lady Penelope.
If you think of this in terms of levies – of which load repayments are a part – there may potentially a way you can do this. Section 85 (4) of the Act (below) allows owners corporations to reduce levies by 10 percent for early payment. Now, if the OC has the kind of loan that allows for early payment, it makes perfect sense for them to do this for you and any other owners who have the wherewithal to do this.
However, if the loan has a fixed term and interest, there would be no benefit in them doing this and would, in fact, come at a cost to other owners.
You can find out the specific terms of the loan by asking to see the paperwork from the strata manager, secretary or treasurer of your scheme
Section 85, (4) An owners corporation may, by resolution at a general meeting, determine (either generally or in a particular case) that a person may pay 10% less of a contribution levied if the person pays the contribution before the date on which it becomes due and payable.22/04/2019 at 11:12 am #37140
The loan repayments, as LP has pointed out, are an Owners Corporation (OC) expense, not an individual one. The OC is the legal person to whom the loan was made. Levies for the OC budget are to cover all the OC’s expenses, including loan repayments.
Where I am (ACT), it takes an unopposed resolution of a general meeting for the OC to resolve to levy fund contributions worked out by some means other than in proportion to unit entitlements. So, if NSW has a similar provision, it might be possible to work something out but you would need to have everyone on board and it would require extra accounting work to ensure it all remains fair without detriment to anyone, both to those who paid out their share early and to those who didn’t who need to cover the correct remaining interest.
It might be possible if it is clearly shown to be a win-win with early and late payers both benefiting from contributing less to interest payments than they might otherwise have done. I would advise you to be very careful how it is presented. Otherwise you could have one or more owners getting ‘the wrong end of the stick’ and convinced that this is a swindle of some sort. People get funny about money.
Cautionary tale: I recall an instance of someone (who was an economist) making a fundamental error about a matter involving money. This person wrote to owners to show them that a proposal from a committee was much more expensive than it actually was. I thought the error in the maths as presented was so obvious that this person had shot themselves in the foot. Sadly, many just believed the conclusion without looking at the numbers. The committee responded explaining the error but I learned that it is hard to get people to read words and numbers are even harder. If the numbers refer to money, some people get suspicious.29/04/2019 at 6:13 pm #37228
Thank you all for your responses.
So far I have been told by the Strata Manager that it needs a resolution to get through, which of course I appreciate and confirms the above.
Your cautionary advice is noted too. So wording of the proposal being put to the vote of the owners is extremely important. Thank you.
I shall follow up the Strata Manager and try and obtain more information on the loan arrangements to see if it is a fixed loan (which I don’t think it is as it was on the basis that we would only repay what had been drawn down and at our last AGM we were advised that we hadn’t drawn down the full amount originally planning to be borrowed.) And also if there would be benefit or cost to those owners who are unable to pay out the loan in one hit. Obviously if they would be disadvantaged, then I wouldn’t be interested in proceeding. I am hoping that it would be a win-win situation.
Again, thank you both for your valuable advice.