Hi all,
Just converted my ‘first home’ into an IP and looking to use it as leverage for our next investments. The property’s valued about about $380k and we have about $58k in equity (about 15%) – I’ve had it for a little over 7 months now. Would it be wise to start using the equity as deposits for other investment properties or should we increase the equity to 20% before considering our next investment to avoid LMI?
We’re looking at investing in PCF properties that are no more than $300k.
Would love to get some feedback on this.
Cheers
ChezChez
LMI is a deductible expense so if it gets you into another IP quicker then it is just a cost of investing.
One thing to bear in mind is that you can access all of the equity in current property as most lenders will only go to 90-95% on a refinance. Make sure they dont cross collateralise the two loans and you can’t go far wrong.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New Shared Equity scheme has arrived – Email us for details.Richard Taylor | Australia's leading private lender
Banks will usually follow this criteria with lending against your equity:
They will let you borrow up to 80% of the house’s value, less any existing loans. Some will let you borrow more than 80%, but they make you pay Mortgage Insurance. This is a one-off fee, but is still a considerable cost and eats into your I.P returns.
MY personal view is that investing with Mortgage Insurance means you are gearing yourself too high; to a dangerous level.
They will also take serviceability of the loan into account and every bank has a different formula for working this out.
If your PPoR is worth $380k, the banks will normally let you borrow
up to $304k, less any existing loans.From your post you said you have $58k in equity after 7 months. I am assuming you still have a loan?
This reads to me that you might have paid $322k for the property and obtained 100% finance, or you paid a bit more for it and put in a cash deposit?
Either way, it seems like you may not have much, if any usable equity after you deduct the existing loan from the property value.
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
From your post you said you have $58k in equity after 7 months. I am assuming you still have a loan?This reads to me that you might have paid $322k for the property and obtained 100% finance, or you paid a bit more for it and put in a cash deposit?
Thanks Richard and Marc!
Marc, with regard to your post,
I have a loan of about $320k on the property and put down $58k as a deposit. Can you clarify what you mean as ‘useable equity’?
Cheers
ChezUseable equity = Assume you have a house worth 100K and a loan of 70K and the Bank will go to 95%. then you will have
100 x 95% = 95k – 70k = 25K of usable equity.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
New Shared Equity scheme has arrived – Email us for details.Richard Taylor | Australia's leading private lender
Thanks Richard. You beat me to it.
I was going to explain it this way;
the ‘useable’ equity is what you can actually borrow after the exisiting loans have been deducted from the 80% of the house value.For example; you have a house worth $400k.
80% of this is $320k. The Bank will let you borrow this amount, less any existing loans. You have an existing loan of $200k.
The $200k is deducted from the $320k, which leaves you with $80k of ‘usable’ equity.I still stand by my statement earlier – I don’t think it is a good idea to gear or leverage over 80% of the PPoR, or even across the portfolio.
Life can throw curve balls and I think it is wise to keep a bit in reserve just in case.
My personal cut-off point is 60% LVR, but I like to sleep at night.
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
If its valued at $380k and you have $58k im equity, how much are you in debt? $300? More?
The point is if you loan another $300, then you are $600k in debt and paying essentially paying $300k at 16%. Where as the houses only make about 8%. So the values of the 600k would have to increase in value 8% per year. There is no way this is going to happen definatly.
You are much better simply paying down your debt on the first IP completely, then use the first properties rental income to help pay for payments on the second.
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