Hi everyone,
I've purchased my first IP and have almost finished the renovations on it. The purchase was for $315k and I took out a personal loan for $30k to perform the renovations.
I'm planning on refinancing the home loan and using the improved equity to pay off the personal loan (which is with a different bank). I've got a few questions:
– Will the bank let me do this, even if I'm not using the refinance to apply for another home loan?
– Is this the best way to do it?
Thanks,
Ben
Hi Ben
Most banks will do it – it depends on whether the valuation stacks up and it fits within their policy.
Talk to an accountant about whether the loan would be deductible. Given that the personal loan was used for IP purposes I think you'd be able to argue that it would be – but I'm not sure (and I'm also not an accountant).
Best way to do this is to order an upfront valuation (if possible) with your current lender. If it comes back high enough – access the equity and pay out your other loan. It might be worthwhile setting the equity release as a separate split (and it would be essential if for some reason the equity release wasn't deemed to be deductible).
Consider the costs when doing this though – including any LMI costs (if applicable). On the surface, it sounds like it would be a cheaper option due to home loan rates being lower than personal loan rates. However, if there's a hefty LMI cost involved – it could erode the benefits.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi Ben
As Jamie says.
Unfortunately with some loan planning at the start you could have done a reno loan at home loan rates from day 1 and this would have saved you the higher interest rate on the personal loan and also the LMI.
We do a fair of this type of loan where the client borrows say 90% of the purchase price and then a further amount to cater for potential reno or development costs etc all done at home loan rates from day 1.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Jamie – Thanks for the advice. I'll speak to my accountant and work out what I could do and what the most beneficial choice would be.
Richard – Thanks for the advice as well. That was my original idea, as I thought I could just add an extra amount onto the loan at the cheaper rate. However, I was advised by my mortgage broker that it's better to get a separate loan. Perhaps as my LVR was already 95%.
I'll let the forum know what the result is, in case anyone else has this question as well.
Thanks!
Yes, you could do that and yes it may be the way to go. If interest is deductible on the reno loan then refinancing generally won't change this.
But, will you need to pay LMI?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
95% + reno loan in 1 go would have been possible so no idea why your broker didn't recommend that upfront.
No LMI charged on the reno loan so would have a lot cheaper than refinancing later.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hmm, I didn’t realise that I could combine the reno loan and the IP loan together.
I’ve spoken to my bank this afternoon, and the outcome is I’m not able to refinance due to my current LVR.
I borrowed at 95% LVR, and the bank has advised that due to their policies they need a maximum of 90% LVR for the new loan. It means that my property would need to be valued much higher than it would be worth, so the refinance is not possible.
It’s not ideal, but I do have a plan B so I’m not sitting around worrying about how I’m going to pay off this loan. It just works out to be a bit more expensive.
I’ve learnt a couple of things – make sure you check your loan structure at the start and understand the implications of refinancing. In hindsight, using the recommendations from everyone above would have gotten around this.
On the positive side, the reno is almost done without any major problems and within budget should increase in value regardless.
Thanks again!
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