Just wondering how the equity in your home is used. If you use say $60000 of your equity to finance a home costing $300000, are you still taking out a loan for $300000, with your equity as security. Or is the $60000 counted as a deposit so that you only need to borrow $240000 plus purchase costs?
Hello Breammaster
I'm not sure why none of the MB's on the site, who are usually really helpful, have answered you so I'm going to have a bash. Please remember that I am not a MB.
Actually I think you can probably do it both ways though they are not equally good in my opinion.1. Take out a loan for $300K with the security being both your home and the IP. This is called cross colateralisation and is not the best method as it ties up both your properties on the loan. Also, as this would be a 100% loan I don't know if LMI applies even though you have enough security.
2. Take out a LOC against your home of $60,000 and then a loan of $240K against the IP
3. Increase the loan on your home by $60,000 making sure that you use a split loan facility so the interest on the additional amount is easily identifiable as this will be tax deductible as it's for an IP. Then you take out a loan for $240k against the IP.
I think the last method would be the cheapest as I believe the interest rate on a LOC is higher than the interest rate on a residential loan.
I think if you use a savvy MB they will be able to offer you professional advise and it should be free. There are several on the forum that are investors if you don't know one.
If I'm wrong will someone please correct this.
Hope this helps
ElkaYou can do either.
If you cross collaterise your first property – ie the same bank gives the second loan and secures it against the first property then the new loan is the full $300K.
If you wish to avoid that or use a second lender then you need to raise the loan on the first property to get the $60K then you borrow $240K against the second property.
Similar cost structure. Although the first option may be slightly cheaper if you use a professional package type product with no app fees for new loans.
Some lenders will agree to not cross collateralise, however most automatically do unless negotiated with upfront.
Good Morning Breammaster,
If you have enough equity in the first property, you don't need to use the second one as security just because you are buying it.
You also need to consider your position in the future. You may have to use both as security with a view to getting one or the other released when you have sufficient equity in it.Sorry Elka
Was actually away on holiday so missed this one.
Reading the responses i think Simon has hit the nail on the head.
Richard Taylor | Australia's leading private lender
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