Help on Equity refinancing

Banks as a rule will only let you use 80% of the equity in your home, less any outstanding loans. Some banks will let you use more, but personally I think that is pushing the safety factor pretty high – not the banks; yours. Personally, I won’t go over 60% LVR (Loan to Value Ratio).

To answer the first question; you can set up your loan in two ways;
a) A line of credit on your own home, which is used as the deposits for the I.P’s, and the balance is from separate loans for each property either with the same lender, or someone else.
The deposit amount will vary from lender to lender, but is usually 20% which you provide from your L.O.C on your own home. The less deposit you provide, the more LMI (Loan Mortgage Insurance) the lender who is providing the second loan will ask for. It is a cost you should avoid if you can.

b) A line of credit on your own home, which is extended to incorporate the loan on the new I.P property/ies as you buy them. All properties are secured by one loan, which keeps increasing as you purchase more properties.

There are many arguments about which way to go with this. Some people advocate startegy a), some advocate strategy b).
Of course, in either strategy, you have properties which are 100% or more financed, which makes it very hard to obtain a +cashflow property.

Do more research on each one and talk to an accountant who is knowledgeable on property investing, then make your own choice.

To answer question 2;
My .002 worth – I have done both, and am using b) now. It is a lot easier and cheaper on fees, and with the right property tracking software, is easy to sort out at tax time.
Some might say this is cross-collaterlising, but I don’t make any risky purchases and don’t intend to sell, so I am not worried about the prospect of having my home taken away.
I have sold a property under this strategy, and the lender simply reduced the loan amount, refunded the difference in the mortgage stamp duty and we continued on.

If the equity in your girlfriend’s house is $240k, then technically she could use this as deposits on 6 x $200k properties ($40k deposit on each), but in reality, you have to also allow for purchase and finance costs, so it is probably only 4 or 5 properties. Or, you could buy 1 property worth $1.2 mill !! (I wouldn’t recommend that).

The other issue which will come into the equation is the servicability of the loan. This may run our before the equity does if the properties are not +cashflow, thus you cannot keep buying.

Cheers,
Marc.
[email protected]

“we get sent lemons; it’s up to us to make lemonade”

Dave

As Terry has pointed out why not look at setting up a Loan on the property to 90% of the valuation. Sure there wil be a cost for mortgage insurance but as the purpose of the funds is for investment the premium becomes Tax deductible.

Then with the available funds draw down only what you need to cover the deposit on the first IP and acquisition costs and take out a stand alone loan secured upon this new investment security.

Repeat the process with your future purchases.

Prior to proceeding ensure that you have set up the entity in which you intend to invest in whether it be a Trust, Company, Partnership etc as a little time getting this right now could save you thousands when it comes to Tax time.

A good MB should be able to guide you through the maze.

Cheers

Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.

Dave

Just make sure a Financial Adviser discloses to you any charges he makes.

I only charge for the preparation of a Statement of Advice for my Investment clients but nothing for life or income protection.

Certainly should not be charging anything for organising a loan for your future investing although some of the stries you hear nothing suprises you these days.

Also make sure he is able to assist you with your loan arrangements and is appropriately accreditated.

Cheers

Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.