hi all,
this is a pretty dumb quesition, but i thought I better get some clarification:
we are buying an IP, the bank can give us 80% loan. my broker said that if I need to borrow the whole lot, I can use our family home as a 2nd security. THe IP is 330k, our family home is 1.3 million, all paid off. is it 20% extra loan worth to put the family home at risk? and what is the risk? all the properties are owned by joint names, me and my husband. when we use our family home as security, do we surrender the deeds or the bank just put a caveat on the house?
thanks.
Hi Rebecca,
Welcome to the forum. Your questions are not “dumb” at all.
Assuming you can service (repay) a larger debt, you could borrow more than 80% on a property purchase assuming the security property is suitable to the lender. Going over 80% would result in mortgage insurance which is a waste of money if you can avoid it. Luckily, you can avoid it.
In your example, the purchase price of your investment is $330,000. To settle this property would total about $345,000. Assuming you only take the 80% from your lender, that will give you $264,000. You would need $81,000 to settle the property.
If you have the cash you need, this is a good thing. You do not need to use it though. Some people like to have a lot of cash on hand just in case something pops up.
Should you want to keep your cash, you will need to borrow the 20% plus the settlement costs (about 4%) against your family home. That would mean a loan of about $81,000. It is a very small loan secured by an expensive property leaving you a lot of equity. The whole debt will also be deductible (if you need deductions) as the purpose of the funds is for investment.
Regarding your risk questions, YES it will put the home at risk. The risk is that if you can not repay your debt, they will sell your home to recover the funds. This is highly unlikely in your situation seeing you have so much equity available on your family home.
Also, should things go really bad and you had to sell your investment property for 10% less than what you paid, you would still only owe about $48,000 secured against your family home which should be fairly easy to pay off. Proper insurance will cover you in the event of loss of income or death of income earner or even loss of rental income in any case.
In other words, assuming you have a healthy income now, your risk of losing your family home would be very minimal at this low level of borrowing against it.
As for the deeds, they will take a mortgage over the property (not a caveat) and hold the deeds. This is not a bad thing as they will be stored safely. It is not really an issue who holds the deeds anyway as long as you make your payments.
Some extra tips…
* Do not cross-collateralise your homes (ie: tie them together). Make sure the loans stand alone.
* If you have the cash, use an offset account or unlimited free draw loan and deposit the cash into this account straight after settlement if you do not need the tax deductions.Proper structuring is very important and will depend on your individual requirements. Sitting down with a good mortgage adviser / broker will be invaluable. You may even end up buying a few more investment properties instead of just one.
Good luck with it all and let us know what you decide to do.
Robert Bou-Hamdan
Mortgage AdviserHaving around $1.6mil in property securing a $300,000 loan is a bit much.
I would look at borrowing against your home as a separate loan and using this as deposit for the investment property. That will give you flexibility if you wish to purchase more property in the future.
It would also be safer, as if you were to default on your investment property, the lender could not automatically take your home – unless with the same bank.
Terryw
Discover Home Loans
North Sydney
[email protected]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
Terry, wasn’t all that outlined very clearly in the post above?
I don’t think anyone suggested borrowing any more than the deposit and fees against the family home.
Robert Bou-Hamdan
Mortgage Adviser
You must be logged in to reply to this topic. If you don't have an account, you can register here.
