Jac,

I’ll play devils advocate because you did ask for pros an cons…

The risk is substantially higher when gearing at this level. Jamie M pointed out the benefits of gearing when prices grow. Gearing will enhace the results either direction in the property market.

For example.

If you are geared at 80% and the market dips 10%. You lose 50% of your equity.
If you are geared at 90% and the market dips 10%. You lose 100% of your equity.
If you are geared at 95% and the market dips 10%. You lose 200% of your equity… Now equity is negitive.

If you take the US and UK markets as an example. If you had 3-4 properties and were geared at 90% or even 80% a few years ago, you went bankrupt.

Property investors (compared to owner occupiers) in Australia are up to 5 times more likley to default (based on major banks current arrears / loans in collections).

Moral of the storey is gearing has benefits which are listed by other people above. It is also a tool that was previously adopted by every bankrupt in Australia.

For every millionaire in Australia that got their through gearing. There is someone else that lost everything due to unexpected circustances – e.g. Lost employment when they had a neg geared property portfolio.

I love gearing. But I understand the risk. Make sure you do to.

The common similarity between Millionaires and Bankrupts: is gearing!

If you push the loan to 250k (or take a credit card to get total limits over 250k) most the banks will give you 0.7% off. You need to cross 500k to get this at CBA. This will get you under the rates you are quoting.

Hi Dale, if you start with a smaller block you might get through retail e.g. Like a home loan. For example some banks will say contruction of up to 3 properties on one title is fine via the retail channel.

Commercial is a lot more complex; largly case by case basis.

I wouldn’t walk in to the bank…

Branch lending is the “starting point” for a lender. E.g. Crap wage / often in their first 6-12 months from being promoted from a tellar. If they do well at this they move in to mobile banking or relationship management.

Mobile lending is also interesting. There are a lot of non-proformers who don’t write a lot of business. You then get the “top” mobile lenders that write 100M to 200M p/a and have a couple of staff.

Brokers are no different. There are far too many in Australia with the average broker writing less than 700k per month – or 1-3 deals. These are the guys you need to be wary of because lenders like CBA and Westpac may not deal with them (they won’t meet volume requirements).

You then get the good brokers. They lodge good volumes and often get preferred treatment from the banks. For example, a CBA diamond broker has RED Text on their deals that states “Diamond Broker”. These deals cannot be declined unless the credit manager calls the broker first, they get mortgage docs emailed to them within 24 hours of approval and their applications / settlements are processed by a seperate priority team.

In short – you can go to a bank and get declined. But then talk to a good mobile lender or good broker and get the same deal approved. Usually this relates to an experienced lender mitigating and explaining risks / reasons to approve a deal where most brokers simply fill in the forms and send them in – no comments, no notes and no relationship with credit.

The real question is how to work out who is competent and who is not… Unfortunantly I’d say the majority or brokers and bankers are not up to speed…

If you get the right banker. They were recently paying conveyancing costs. My guy has up to $500 per client to cover costs – need to be around 500k to get that though – won’t happen in the branch.

Earlier this year I put a client with a major and saved them 6k in LMI compared to a loan contract they had nearly signed – was not a big loan either.

The majors often self insure which is cheaper. They also have slightly cheaper LMI in some cases due to the volume of business they offer the insurer.

Don’t think that LMI is always the same price : – ). Non banks and credit unions are usually a bit more…

I only love banks at the moment…
If it’s a matter of trust; in the current market I’m happier to trust them to know there funding position is stronger than non banks and DEF is small so if I have to move unexpectedly I can.
Re the annual fee. In the original post it’s alreay paid – therefore the new loan attracts no extra cost so why pay over $1000 in establishment fees to another lender with high DEF?

At a loan of 320k (as you mention above) would be 6.54% at NAB. Cheaper rate, less DEF and full service product…Blight have an annual fee but his covers all transactional banking as well – the even go another 0.1% off if you ask nicley…

Personally I think you will find it very difficult.
You mention you have little equity so yes – you will need an equity partner / cash man.
You’ve also said it will be your first project – getting a cashman to back an inexperienced developer on their first project (with little equity) would be a bit challenging.

I am being devils advocate. Great to see the ambition but you need to have something to bring to the table…

You could get maybe refinance to 90% of your current property (subject to LMI). E.g. Property value x 90% less existing debt = fund available.

Realistically – When you then go into your project you should aim for having 20% depoist for both land and construction costs – this is assuming you qualify for finance for the debt long term. If you are reliant on the sales to repay the debt you will need to go via a commercial banking channel – this might require more deposit, fees and a higher rate.

It can also be hard to get an equity partner for a project before knowing what the project is. For example- lots of people get the land and plans etc before finding the investor. This way you have something to bring to the table (ownership or contract to buy the site) however it requires the ability on your part to provide at least some initial outlay of funds.

Bit of a chicken before the egg scenario…

I think your comparing the standard variable rate of the banks with the rates of the credit unions.
The banks discounted rates almost always come in better. I’ve never seen someone take a standard variable with a bank without a discount.

Last time we argued this on a post you could only come up with a couple of dodgy mortgage managers with 2% deferred establishment fees and history of shafting people with the GE / Challenger out of reserve increases – they also had legal fees and Val fees etc

Jamies got a point but there’s not many creditable lenders out there that will beat NAB, ANZ or CBA on rates / fees etc
If you’re already on a pro pack there should be no set up fees, no Val fees, no settlement or legal fees etc etc… If you already pay anual fee it should remove all fees from the new account. No additional annual fee is you already pay one.

Eilatan- what bank are you with?
Are you already paying an annual fee?