Hey all,
I'm new here and this is my first post. I have been reading through various posts to learn more from you all on investing in property. I have a question regarding setting up an investment loan.
I am in the middle of organising a loan with the bank for the first IP I'm purchasing (Vic.). Actually, the loan is already approved, ready and waiting for settlement day in 4 weeks time. As I am new to this whole IP area, I ignorantly agreed to accept the investment loan structure where my PPOR is used as collateral. This is my situation :
The equity on my PPOR is $400,000, with $20,000 owing.
Puchase price for IP is $290,000
Investment loan 80%, 20% PPOR equity.After reading thru' the posts here, I'm not sure if I've done the right thing. I now think I should go with a LOC on PPOR 20% and 80% Investment loan, which will remove my PPOR from the being a collateral for the IP.
I spoke at length with my bank to change the set up of the loan, and to use LOC instead before settlement date. For 45 mins she went through the reasons why I shouldn't do it as it will make the loan very messy, complicated, extra loans to look after and will make it difficult to calculate the deductible interest. On top of that, I should not be concern about having the PPOR title on the investment loan. At first she even went to the extent to tell me that I needed to have cash upfront to pay for the 20%, and the PPOR equity does not come into the picture if I did not want the PPOR title on the loan.
In the end, she agreed to make the changes if I wish to but told me to bear in mind that none of her customers have ever requested this kind of set up that I'm seeking. Is this true? Am I understanding all these in a wrong way? BTW, the bank is one of the big 4!
To sum it all, should I go with LOC? and what are the negatives should I sell my PPOR at a later date to purchase a newer PPOR? How will this affect the LOC?
Thanks heaps.
hope tomorrow is a newERday7 for me.
Hi Newday,
I'm of the opinion that not x-collateralising in more hype than substance and it will come down to your preference. Examples below ignore stamp duty and costs and assumes purchase of 300k (rounding to make it easier).
OPTION 1 – Not crossedExisting home loan – 20k (against PPOR)
Investment loan – 60k (against PPOR)
Investment loan – 240k (against INV)
OPTION 2 – CrossedExisting home loan – 20k (against PPOR)
Investment loan – 300k (against both properties)IF YOU SELL YOU PPOR
Option 1 – you need to payout the 20k loan and the 60k loan. Leaving only 240k (80% of the inv)
Option 2 – you need to payout the 20k loan and 60k of the 300k (reducing it to 240k – 80% of the inv). The end result is the same. Refinancing the PPOR will be the same.
RISK IF YOU CROSS
If you sell your PPOR and the investment property has reduced in value to 280k. The bank may ask you to reduce the loan to 80% of the reduced value of the investment. If you don’t understand your loan structure this can be confusing.
NOTE: If you cross. After a year or two the bank can revalue the investment. If your investment has increased in value and the loan is now 80% of the new value you can have all other security released from the contract.
Banks call this a partial discharge and it is usually free.Regarding your bank being one of the major 4 – they can all do it both ways – your manager just cant be buggered. It should be your preference.
Let me know if you have any questions.
Banker
Banker wrote:
RISK IF YOU CROSSIf you sell your PPOR and the investment property has reduced in value to 280k. The bank may ask you to reduce the loan to 80% of the reduced value of the investment. If you don’t understand your loan structure this can be confusing.Thanks Banker for pointing this out to me. Infact I do plan to sell my PPOR in the next 12 months. I don't think the value of my IP would drop (fingers crossed) but I also think it will not appreciate very much as well in that short time. But its definitely good to know the risk involved.
Yes, I suppose it's all down to our preferences. Thanks again.
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