Alot of people know on this forum know that I am planning to buy an dump in a few years (around 200k) and live in it for 6 months while I do it up and gain the benefits of the free SD and the FHOG.
While i am renovating this property over the 6 months could I capitise my interest on the loan. So that the loan will slowly be creeping up. As my loan will be quite small, I have calculated that the increase to the loan over the 6 months will at maximum be 6-7k.
This will not drastically increase my loan, but it will help in the 6 months.Also another thing, while i’m renovating this property, I will need access to money(alot of money), how can i do this. I won’t be ableto use all my income to support my renovations. I dont want to use credit cards(bad debt,never use if cant pay before free period ends), ive heard something about a credit thing with your loan where they give you a lone of credit(like a credit card) but its at the same interest as the loan(and you can also then add that amount to the loan, so its like redrawing it or something. Can someone please explain this in detail to me.
Thanks,
Christopher Fife.Hi Christopher
What you want is a line of credit, this is a mortgage in most senses.
except it works like a credit card. You have a limit and you only pay interest on what you use each month.It is what I use for my reno’s, the line of credit is on my ppor this is no problem with tax as it is a seperate loan for investment / business purposes only. this way I lend the money to the business and when I sell it gets paid back then I buy another.
Therefore I can make cash offers and not deal with the bank all the time.
One thing though as you can draw on them and not make payments until you reach your limit you can get into trouble.
By trade I am a Senior Bookkeeper so I do know some tax stuff, not to much prop investment stuff though, I have operated on a credit card for 15yr now, I use it for everything and put our wages etc into high interest accounts (we paid the mortgage on the ppor years ago)and once amonth a the very last minute I pay the credit card. I love spending other peoples money for free whilst mine earns more elsewhere.
Anyway when we got the line of credit I started to put our wages etc into it to lower the interest and then pay our credit card each month.
Seems reasonable but plays havoc when tax time comes, because the ato treats the wages in as a repayment and the money out a personal drawings therefore not allowing you to claim the interest on it. makes the interset claimable calculation a nightmare.I stopped real quick and reverted to the old method except I transfer most of the excess funds into the equity line. Where it reduces the interest but we can still get to it if needed.
Celeste
Celeste
That helps alot celeste. one more question, what is the interest rate on this line of credit? is the the insane normal credit card rates or your mortgage rate(7-8%) or somethign else?
Also what do you think about the capitising thing during the reno?
Thanks celeste,
Christopher Fife.Interest rates on LOCs are the same or slightly higher than standard home loans – 0.1% higher sometimes. To avoid the higher rates, it is sometimes possible to use a normal home loan like a LOC if it has free redraw – but they don’t like you capitalising the interest.
It is possible to capitalise the interest with a LOC, and to withdraw extra funds, but you will need equity to do this. If you are starting off on your first property, then you will probably have a high LVR. It may be best to borrow 100% if possible, and put all your spare money in a 100% offset account. Then use this money to live on and for your renos.
Terryw
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Originally posted by Terryw:If you are starting off on your first property, then you will probably have a high LVR. It may be best to borrow 100% if possible, and put all your spare money in a 100% offset account. Then use this money to live on and for your renos.
Thanks Terry that tip, woah!, I can’t believe I didn’t think of it.
Excellent, I will control omre money but my loan will will be the same amount. I can take money form the offset and the loan slowly goes up.Hmm, But I have a problem, I still don’t understand how you can get 100% loans, I can only think in the terms of 80%(the LVR) thingy as the banks won’t allow it. How do they allow 100%?
Christopher.
Just to ad to the last comment. You will usually require 10-20% deposit for a line of Credit product. Where you can find 100% offset products around for 100% LVR lends. If you were wishing to capitalise the loan payments to the loan itself, in any of these cases the capitalisation with only be the funds you have remaining from the purchase. As you are a First Home buyer, usually funds are limited to savings, and FHOG. Unless you have more equity to put toward the purchase…. for example a parents property. Capitalisation of interest or redrawing equity can only occur if there is equity to draw upon.
Colin Kidd
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Hi all
One more thing I do not know wether this is any help, all you can do is ask the bank if possible.
When we built our PPOR we had a building loan, this was a loan approved to a certain amount, it was based on the value of the land and the value of what we were building.
So we had an approved limit, interest kicked when we started to draw down on it ie pay deposit, pay each step to the builder etc.
we didnot have to make repayments until the full amount was drawn and the interest was added to the drawn amount. We borrowed more than we needed, because every new house needs new furniture and lanscaping etc.
If you could prove to the bank the added value of the reno you could add this to the value for the loan.
I do not know if this can be applied to a reno etc or not?
Maybe one of the motgage guys would know or could check it out?
I have found that if I research something and have a few ideas you can go to your bank and ask them. They can only say no. So far mine has said yes. I am getting the int. rate I want with the type of loan I want and I pay only $375 per year for all my loans / accounts and no other fees , only govt duty/taxes.
I hope I have explained it properly.[blush2]
Good Luck [biggrin]
CelesteHi Celeste,
Yes, you can do that, but it is what a bank calls a construction loan. There are some benefits and disadvantages of one of these that can push someone out of qualifying.
1. Lender requires the property to be complete (no walls missing etc) prior to starting.
2. Construction must be on a fixed price building contract
3. Difficult for work where you are doing it yourself. (this classed as owner builder.. dirty word to the banks)The situation regarding no paying interest till you use it is correct, this is the same for Line of Credit and construction loans. Though construction loan payments are usually paid direct to the contractor doing the work, and usually over 5 or more stage payments. A line of credit, you are in control, you write the cheques and assess the work at each stage… The difference between the two is simply available equity. ie doing a $200,000 extension and the property is currently valued at $300,000 with a $200,000 loan owing. This would be a case for a construction loan as the equity is not there. If the property was worth $500,000 with the same situation… then the only other requirement is serviceability.
If the loan is small enough and can service… sometimes a personal loan will work best. Then consolidate this loan into your mortgage at a later date.
Everything here is hypothetical.. Full fact finding, needs analysis and solution identifying needs to be done to suit each persons individual circumstances.
Hope this helps.Regards
Colin Kidd
Loan Saver Network
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Hi all
Like I keep saying, work out a plan of what you want $ how you want to pay & or set it up and go to the bank and ask if they can do it.
Always worth a try.
[biggrin]
Celeste
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