Hi All
I am just after some basic info on the use of equity in our PPOR. I dont quite get the concept.
The PPOR is worth 500k and I owe 200k. I then have 300k in equity.
If I found an IP I wanted to buy that is 600k, it would cost approx 630k including the purchase fees. I could go and and get a loan for 630k, or use some of the equity in my PPOR towards it and get a smaller loan on the IP.
However if I take equity from the PPOR (say 200k) and put it towards an IP wont the loan repayments on the PPOR go up as a result to 400k? It seems like robbing Peter to save Paul to me.
What am I not getting here???
Hi Darivo
To get the loan on the Investment Property you would need to have some form of deposit. Usually 5 – 10 % deposit with Loan Mortgage Insurance or 20 % deposit to avoid Loan Mortgage insurance.
Unless you have the cash available from the sale of shares etc you can use some of the available equity from your PPOR loan as the deposit for your investment loan.
So in effect, even though as you say you are robbing Peter to pay Paul, the way the banks see it, when the transaction is finalised they want to see that a) you have the capacity to service both loans and b) there is some equity in both loans.
A good accountant / broker can advise on how to structure both loans so that the maximum tax benefits / interest savings etc can be achieved.
You are right it is in a way robbing Peter to pay Paul. But you have to remember to make money you have to spend money.
Look at it like this: When you bought your PPOR you would have saved up a deposit plus possibly your FHOG. This in essence was a deposit.
Look at the equity in your home as a DEPOSIT for you IP. Look at in exactly the same way as you did for the deposit on your PPOR.
By keeping the IP under 80% ie you will not pay LMI hence saving you money.
Darvio If you are going to invest in proprety you are going to have to start thinking like an investor. Depreciation and tax deductions depending on tax rates means Peter and Paul can be paid at the same time, by Peter having less tax taken out of his pay packet. By leveraging of one property Peter is also doubling his assets meaning he can also double or tripple or more his capital growth . 10% increase on 1.2 m is a lot more than 10% increase on .5m. So Peter is getting paid twice. Peter has the ability to pay of his PPOR in perhaps 5 years instead of 30 by using income or more likely increasing equity in his IP. Giving Peter more tax efficiency by not havin to pay non dectible debt for very long third time Peter gets paid . The big pay off though is that Peter can Save 25 years interest on his PPOR.
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