Has anyone had any experience with using a personal overdarft as a deposit for property?
This is something I have discussed with my accountant which would allow me to free up equity in the properties as the personal loan is unsecured.
Just wondering if there is any extension to this technique which may be usefull?
Why would you want to pay more for money that you can get cheaper by using your equity? Why do you want to “free up” equity?
Robert Bou-Hamdan
Mortgage Adviser
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Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd1. Personal Loan is just as competitive as home loan int rate as I work for the bank, probably 1% difference. This then allows me to have the main part of the home loan as a st var, I/O or P&I, while maintaining the overdarft as the source of deposits.
2.Having the money paid off the home via the personal loan allows me to free up equity for the next property if there was a lack of deposit for instance…
Does that make sense, is there a better way to go about it without a surplus of funds as deposit?
Originally posted by Alexander2:1. Personal Loan is just as competitive as home loan int rate as I work for the bank, probably 1% difference. This then allows me to have the main part of the home loan as a st var, I/O or P&I, while maintaining the overdarft as the source of deposits.
I have never seen an unsecured loan personal loan (or overdraft as you said earlier) at such low rates. They are usually in excess of 10% per annum. You would be better off using a Line Of Credit but you can do the same thing with an interest only loan that has an offset account attached. You should have an overall interest rate of about 6.5% or less.
2.Having the money paid off the home via the personal loan allows me to free up equity for the next property if there was a lack of deposit for instance…
It is not equity that is going to get you the next loan. It is SERVICEABILITY (your ability to repay debt). Having a more expensive liability means you can not borrow as much as you could if it was cheaper. The best way to do it is to use the equity you have in your property for the deposits.
Does that make sense, is there a better way to go about it without a surplus of funds as deposit?
A surplus of funds is a good thing to have. You let it sit in an offset account reducing your expenses until you need it again or pay it into a property if you don’t want to use it.
Robert Bou-Hamdan
Mortgage Adviser
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Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdIs what you’re leaning towards: forgetting the personal loan altogether and focusing on each property seperately, therefore extending the loan as far as you can take it over the equity of each seperate property??[blush2]
the personal loan is a line of credit loan at 8% unsecured. You’re right though, a line of credit at 6.5% would be more effective, however it needs to be secured against something, this loan is not.
This allows me to use it for the initial deposit for such properties like commercial which need a larger deposit due to less LVR.
Personal Loan, Line Of Credit and Overdraft are all totally different things. Are you getting an unsecured Line Of Credit???? If so, I would love to know which lender does those!
Robert Bou-Hamdan
Mortgage Adviser
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Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdSt George (and ANZ), I believe, have a product called the get set loan: a personal loan at 12.2% with a Max of $50k which is allows the customer to draw on the funds and make a minimum I/O payment on only the funds they use. There is no term on the loan as it is a line of credit. Whatever funds you draw on are the funds you incur interest on.
I should have explained this to begin with.
As you can see though, for a short term answer for a deposit this particular loan can be very effective.[biggrin]
But that loan is 12.2%! Not 8% or within 1% of a normal loan. That is expensive finance for a lot of people.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltdas I work for the bank, probably 1% difference.
I realise for others this may not be the most desirable int rate for money used as a deposit.
Getting back to the original question, by the sounds of it this is not a regular practice that you’ve used or seen used?
Originally this was put to me as a way to purchase the first property because you have no issues with getting through the bank’s beaurocratic formailities of the first property purchase. you would then own the initial property outright as the personal loan is not secured. You would then have that first property security for the next, allowing for a surplus of equity.
As you mentioned before, servicability is a concern when using personal loans as you have unsecured debt at a higher interest rate. Once you have a roll on, you would payout the personal loan with the home loan secured against the property. The strategy is a starting strategy, allowing for that well needed roll on.
Can you see that this would not work?
as I work for the bank, probably 1% difference. allowing me to have approx 8% int rate for the personal loan
I realise for others this may not be the most desirable int rate for money used as a deposit.
Getting back to the original question, by the sounds of it this is not a regular practice that you’ve used or seen used?
Originally this was put to me as a way to purchase the first property because you have no issues with getting through the bank’s beaurocratic formailities of the first property purchase. you would then own the initial property outright as the personal loan is not secured. You would then have that first property security for the next, allowing for a surplus of equity.
As you mentioned before, servicability is a concern when using personal loans as you have unsecured debt at a higher interest rate. Once you have a roll on, you would payout the personal loan with the home loan secured against the property. The strategy is a starting strategy, allowing for that well needed roll on.
Can you see that this would not work?
If it was your first purchase and the lender saw you using a personal loan for the deposit, I don’t think they would like it very much unless you had very strong serviceability. In this case, I think it would be cheaper to borrow 97% against the property, put in some of your own money and pay mortgage insurance and a much lower ongoing interest rate.
Each to their own I suppose but I would certainly never advise anyone to use an unsecured (high interest) loan to purchase property. I believe it is a good recipe for disaster. It is not just about getting in – it also has to be affordable. This is the third thing I tell my clients when looking at their loan structuring….
1. Funds Position – can I complete the transaction?
2. Serviceability – can I make the repayments?
3. Comfort – am I comfortable with this level of debt?If you answer yes to all three using high interest loans, go for it. I wish you the very best.
Robert Bou-Hamdan
Mortgage Adviser
http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter – Click Here
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty LtdThanks for your input, I appreciate it.
They’re good three q’s to ask [biggrin]
cheers, Alex
Yes some people have done this, but it is hard to get a personal loan, and even harder to get a second. If you do manage to get the personal loan, then you have to demonstrate serviceability based on both loans. Personal loans are shorter terms, so the repayments will be high, which will hurt serviceability.
Terryw
Discover Home Loans
Mortgage Broker
North Sydney
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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