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RF Cowman
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@rf-cowman
Join Date: 2012
Post Count: 6
May 21, 2012 - 9:05 am
Hi Cicso
I don't think you have too much to worry about. Although I definitely wouldn't go applying for anymore finance unnecessarily. As Jamie mentioned the last 12 months is the most critical. If your payment history has been conducted well on your Personal Loan and Credit Cards (no late payments or over limit) a broker could use these to mitigate risk to the lender/mortgage insurer. Most importantly, if you have 5% genuine savings, stable employment history (2yrs with current is a +) and stable residential history (again more than 12 months current address) these will assist with a positive credit score. In most cases I wouldn't apply for Pre Approval (but that's just my opinion, unless you're ready to buy), it's just going to be another eqnuiry on your credit file. Also many lenders don't formally assess a Pre Approval (it's used as more of a Marketing technique, effectively they tell you you're approved, subject to fine print, and then you stop looking for finance only to find out when trying to move forward they didn't look at your supporting documents or check with their Mortgage Insurer). I am not saying it's a waste of time, as depending on the State you're buying in, it can be more important. Are you ready to buy now? If not, then continue to save, while you continue to look.
As the other brokers have pointed out a good broker should be able to point you in the right direction in terms of lenders. Some are going to be better than others in this situation.
Best of luck!
RF Cowman
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@rf-cowman
Join Date: 2012
Post Count: 6
May 11, 2012 - 4:43 am
PFrankyX wrote:
Interesting fact, i never considered that actual value of the LMI, only the LVR and just assumed the higher the LVR% the higher the cost.
Ahh yes…….The Devil is in the detail!
Sometimes Bankers & Brokers can just be lazy…..and hence them not wanting to/not recommending spliting the loans for you (as it will mean more paper work, which means more of their time). Other times they don't know any better. But as you've found out it's pretty easy to get a second opinion (or opinions in this case) so hopefully you can ensure the jobs done right!
RF Cowman
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@rf-cowman
Join Date: 2012
Post Count: 6
May 11, 2012 - 3:03 am
PFrankyX wrote:
Ok, so using Cross Collarterisation to link both loans / properties together, the bank has a better hold on my properties if anything goes wrong. The only benefit that i can see from using this method is to limit the LMI i pay 1. PPOR – value $650k / loan $470k ($180k equity) Looking at buying property approx $350k (loan $370 incl costs) Total Loan $840,000 / Value $1,000,000 (84%); therefore only paying LMI this LVR or 2. PPOR Loan – $470,000 / Value $650,000 Loan 2 (deposit etc) – borrowable equity above = $50,000 Loan 3 (IP / I.O) – (Total loan $370 – $50k deposit / costs = $320,000 / Value $350,000) LVR for Loan 3 = 91.4% Does this mean that i would then pay the much higher rate of mortgage insurance but then this loan 3 is secured by only 1 property? The sacrafice to pay more now in LMI to have a better structured loan. … i think i'm getting it now.
Yes, that's right Franky hence the bank always trying to get as much security as possible. Not only is it a lower risk for them, it also makes it harder for you to leave them in the future (a term known as Brick-walling).
1) Funnily enough Franky this is where things actually get more complicated. As by Cross Securitising you can actually pay a higher LMI premium (even though the overall LVR could be lower). The reason for this, LMI is a risk calculated premium. So a larger loan amount becomes a greater potential risk to the bank, so the LMI premiums can/will increase. LMI premiums on a $800,000 loan will generally be higher than on a $300,000 loan at the same LVR (loan to value ratio).
2) So as LMI increases with Loan amount and LVR a good brokers job is to balance the two, to get you the best result. For example it might actually be better to get a little more equity out of your PPOR (more than $50,000) so you could decrease the new borrowings on your IP to 90%. At 90% the Premiums will be surprisingly lower than at 91.4%. But obviously you have to balance this out with your PPOR loan, as it does not increase in LVR too greatly triggering a larger LMI premium on that side of things.
Does that make sense?
But you're right, is often viewed by investors as; It's better to pay LMI/pay more LMI for a better structure. As most of the Brokers on this forum will tell you; Cross Securitising isn't in your best interest, it's in the Banks.
RF Cowman
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@rf-cowman
Join Date: 2012
Post Count: 6
May 10, 2012 - 2:15 am
No problems, you’re starting out, one of the best things to do is – ask lots of questions until you understand J Yes that’s a common strategy used (paying down PPOR debt, to release equity for investment). The unfortunate downside is, by paying down your PPOR debt the property you’re currently in may not make a good investment property in the future (another topic, but worth discussing with your advisor/broker). Remember you don’t have to migrate the available equity immediately, but paying down your PPOR loan you’re going to have the option to release this equity when/as needed for investment. Unfortunately, many investors need to rely on their PPOR equity to build their portfolio. It would be great if you didn’t have to, as this would reduce your exposure/risk. But in reality, the equity has to come from somewhere (unless you have a heap of cash lying around). But the good news is, in the future you may be able to become less reliant on your PPOR equity as your investments (hopefully) grow in value. So to answer your question yes you can release your IP equity down the track.
RF Cowman
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@rf-cowman
Join Date: 2012
Post Count: 6
May 9, 2012 - 10:42 am
Yep you're right paying down non deductible debt should be a priority. Not saying you shouldn't do this. It's just you want to quarantine your non deductible debt and deductible debt. So you should have seperate loans for this. If you had $50,000 cash – you'd pay this off your "home loan" and then create a seperate loan to reborrow it to use for investment (hopefully without LMI). That way you've paid down your non deductible debt and released equity for investment purposes.
Unfortunately you'd pay LMI on the total amount. Hence my comment (assuming you're happy to pay LMI). Again if you're a "cash is king" investor you may want to release as much cash/equity as possible. But others want to avoid it, as it can be expensive. It's about finding the balance that's right for you.
That's a little complicated…but yeah drawing a picture would help . Effectively you're paying LMI on all the loans (assuming your borrowings are greater than 80%). But by not cross securitising your properties you can keep the LMI premiums lower. If you remain with your current lender (and you previously paid LMI) you may be able to structure the loans so you only pay an increased premium for the new borrowings (again more complicated, but may be possible). This could save you some money. Also remember the LMI costs may be depreciated (assuming they form part of your setup for investment). So there could be some benefit returned aside from having access to additional capital/cash.
Yes definitely get a good accountant (and good broker). Best to get these things in order before you put your offer in.
Sorry I'm based in Perth, but I am sure there's a few reputable Brokers in Sydney on this site.
RF Cowman
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@rf-cowman
Join Date: 2012
Post Count: 6
May 9, 2012 - 10:08 am
Hey Franky
I note you mention you have 180k of equity. Understand there is a difference between Equity & Usable Equity. In most cases lenders will allow you to access up to 90% (if you're happy to pay mortgage insurance) of your existing property vaule (held, not purchasing). So in your case if your PPOR is "valued" at $650,000 and your debt/limits are $470,000 you'd have approx $115,000 Usable Equity.
So you could keep your existing loan (as P&I or restructure it to Int only – there are pros's and con's to both). Then setup a secondary loan (secured against you PPOR) to access that ($115,000 – this would best be setup Int only) again assuming you're happy to pay LMI to access more capital/cash? These new funds can then be used as "Deposit(s)" for your new IP purchase(s). As the loan will be interest only you'll only pay interest on the funds drawn for "deposits/costs" (so if you don't use all of the $115,000 you're not going to pay interest on the money you don't use). You'd then setup different loan(s) (as Jamie mentioned) for the IP property purchase (and future property purchases). These loans can be secured up to 95% of the new purchase property value (plus LMI), depending on the security type and location. Your 5% deposit, plus purchase costs will come from your $115,000 loan. Remember by only putting down a 5% deposit you will pay the highest LMI premiums (the more deposit you put down the lower the LMI premiums will become). Some people believe "cash is king" and are happy to pay more in LMI costs to hold onto more cash at bank. Others think LMI is a waste of money, and try and avoid paying it (by putting in a larger deposits). Remember if you only use the cash from the $115,000 loan for "investment purposes" the interest that you pay on the loan should be tax deductible (caution, I'm not an accountant, so do your own home work). But just don't mix up personal expenditure (like I wana buy a new car or go on a holiday) from this account.

Agree with Jamie, the first Brokers comments seem strange and not in your best interest.
A good broker should be able to take you through the Pro's and Con's of the above. As again it's just a starting point.
Best of luck!!!