Silly Questions

Good Questions Dan,

Equity is only ‘equity’ until you draw down on it or borrow against it.
In your example if your property did go up $50K and you wanted to use that, you could take cash out option which would instantly change the principal value of the initial loan or borrow against it with a LOC (line of credit) which you can draw down on as needed. So each time you draw down on it your equity is effectively decreasing and principal loan value increases. LOCs can be an effective tool as you pay interest on whats drawn down, which is unlike the cash out option where you pay interest on the bulk some you have extracted from the equity.

When people use 5% for frees and charges it usaully includes Stamp Duty as this is the major cost in most circumstances. It varies from state to state but is usually 4% I think and then approx 1% for misc fees (ie. legal fees, settlement cost etc)

I hope I’ve explained that right.
Anyone else got simple ways of explaining this?

Happy Investing
Joshua

Investor Finance
[email protected]

That is my understanding of it, you borrow against your existing equity to use as a deposit on another IP.

Remember, the only silly question is the one not asked.

CATA
Asset Protection Specialist
[email protected]

Here is an example.

$100,000 property with $100,000 loan
LVR = 100%
Equity = nil

after 5 years
$150,000 property, loan $100,000 (interest only)
LVR = 100,000/150,000 = 66.67%

You can generally borrow up to 80% of the value without incurring LMI.

So in this situation you could increase the existing loan to $150,000 x 80% = $120,000. But you already have a $100,000 loan, so that is $20,000 extra you have drawn out.

You will still have 20% equity in the property after you have drawn this money out.

You can then use this $20,000 as deposit on another property. eg. $100,000 property, $20,000 deposit, $80,000 loan. You have effectively borrowed 100% of the property value, but now have 20% in this property too.

wait another 5 years and both properties may be worth $200,000 each.

Total value = $400,000
Total loans = $120,000 + $80,000 = $200K
= 50% LVR

So you increase both loans to 80% = $320,000 less current loan of $200,000 = $120,000 extra.

use this to buy 6 more houses.

Terryw
Discover Home Loans
Parramatta
[email protected]
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let make it three

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I like Terrys example and it spells it out pretty clear for me (thanks Terry)

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**WARNING** This is a long post and i apologise, i hope this answer some questions and it isnt too confusing to understand the jest of what im saying. **WARNING***

Yes the repayments will be higher as the loan amount has increased. Ring your lender to confirm the minimum repayment amount every month.

I think what terryw means is doing an internal refinance or what we like to call a “Top-up”. grabbing the equity out of your home by increasing the existing loan amount. Loan amount goes UP your equity goes DOWN.

If you wanted to use the first property you bought to put a deposit down on the second one, all we do is dip into your equity by toping up your existing loan, so that the equity you diped into can help you pay for a deposit on the house and maybe cover the cost of the fees incurred in buying the property.

CRASH COURSE IN HOME LOANS TIME!!!

To obtain equity from your house, you must first apply for a home loan to get it. So for instance, that the house was worth $120,000 now and the loan against the house was $80,000. You effectively have $40,000 worth of equity, but here is where it gets abit strange. All loans have a fee called LMI aka Lenders Mortgage Insurance. Now every borrower doesnt want to pay this because it can be a huge fee dpending on the loan amount. To get around this, we only borrow up to 80% of the value of the house, because if the LVR (loan to value ratio) is less then 80% when applying for a home loan, the LMI (Lenders Mortgage Insurance) is payed by the lender. (if it is a Full Doc Loan)

So lets put this into an example. You want to buy your first house. Its sale price is $400,000. Most lenders will only allow you to borrow up to 95-98% of the value of the property, thus making you save up the rest, which is alot because you have to cover for all the fees of the lender and the property and also the deposit on the house to make it fit within the banks guidelines. Now you are asking, well what is the estimated fee for Lenders Mortgage Insurance, LMI is calculated on a percentage of the loan amount, this can range from say 0.5% to 3%. We shall use a figure of say 2.5%. 2.5% x $400000 = $10,000 !!!!!! That is only LMI fee, then you got to consider paying the Stamp Duty on the property, application fees, settlement fees etc etc. Its a very hefty chunk out of your savings. To get around this will only borrow up to 80%. Then this figure of $10,000 will go all the way down to 0! However, the money that you have must make up the difference.

Ok back to the story, you can in fact, dip into this equity whenever you want however it also comes down to the price your willing to pay to get the equity. If you wanted to avoid Lenders Mortgage Insurance, then you will only want to borrow up to 80% of the value of the house. Getting back to the intial example,

value = $120000
$120,000x 0.80% = $96,000.

Take this away from your loan 96000 – 80000 = $16,000. You can easily obtain around $16,000 without paying to much in lenders fees. However, if your willing to pay for the LMI then you can borrow up to 95%.

$120,000 x 95% = $114,000.
$114,000 – 80,000 = $34,000

$34,000 is what you can borrow up to (depending on Income of course), from this you gotta deduct LMI, application fee, mortgage stamp duty etc etc.

So it all comes down to what your willing to pay to grab the most amount of equity.

END OF CRASH COURSE

Now! Onto Cross Collaterisation. Its quite simple, its using your equity on your current property to help cover the cost of purchasing the next property, but your not increasing your current loan, your multiplying the securities on the new loan, thus have a 2nd Mortgage over your current Property. Let me explain, Cross Collertisation means your placing 2 or more securitys on ONE Loan. An example will help understand this better.

2 Propertys:

Property A = $120,000
Property B = $150,000

Total Loans against Property A = $50,000
Property B is the house your buying.

You go to CBA and apply for a loan of $157,500 to buy Property B plus a little bit extra to cover the fees incurred……..wait Josh, didnt you say that Lenders will only lend you to a percentage of the property value…… Well yes that is correct.

The LVR in this example is

$157,500 / $150,000 = 105%..But Josh…didnt you say most lenders will only lend to about 95-98% of the property value…well yes……So how do we get this LVR, currently at 105%, to 95-98%….well it lies in the equity existing in the current property. When you apply for the loan, when you say which property will be securing this loan, instead of the loan securing one property, its securing two propertys…..does this become abit clearer??…….sooooo we use this simple The cross collateralise equation:

Total Loans / Total Value = LVR
($50,000 + $157,500) / ($120,000 + $150,000) = your LVR is now 76% rather then 105%, making the transaction alot more affordable.

So basically, cross collateralising is securing many propertys against one loan. However this isnt always advisable, as it becomes abit “messy”. As its hard sometimes to remember which property is securing which loan and if you want to “discharge” one of the securities off the loan. Most buyers/investors would like a very tidy loan, One Security Over One Loan.

Like i said, i apologise, i hope i havent confused the hell out of you’se.

Regards

Joshua McEwen
Finance Broker – WA

http://www.prestigeloans.com.au

Brokers Lic 1297
Licensee Brett Christie

hit the nail on the head!

Anyway is possible, its up to you to choose the path you want to go down.

MPI = Mortgage Protection Insurance is different to

LMI = Lenders Mortgage Insurance

MPI is protecting your repayments if you fall ill or lose your job or become disabled. This is an insurance that you take out for piece of mind so that any time in the future that you may not be able to make repayments on the loan, then the MPI company will pay them for you untill you reach to your normal status again

LMI is protecting the lender from any misconduct you make on the loan, so if you fall down the crapper and the house is sold under the mortgageee, however the proceeds of the house doesnt fully cover the loan + Solicitor fees + Enforcement Fees yada yada yada, then the LMI company pays the gap to the lender. LMI is protecting the lender not you.

Regards

Joshua McEwen
Finance Broker – WA

http://www.prestigeloans.com.au

Brokers Lic 1297
Licensee Brett Christie

Thats my attitude to anything. If I don’t know I ask, its the only way.

Thanks Josh that deserves a round of applause. Great stuff. So much more understanding has now come to me, thank you.

Christopher.