Hi all,
Just wondering if anyone can give advice to a property investment dummy on using equity.
I have around $100,000 in equity on my apartment (this is based on the increase in properties value plus my initial deposit).
How can I best use this? My aim is to be able to have a house in the inner city (Melbourne) one day & I figure by having two apartments that would one day enable me to sell both and buy my house!
Do the banks count the equity as available money? Would they give a second loan to buy a small property?
I don't have that much available cash as I am putting a fair bit into paying off property one.
I'm a real beginner so would love to hear what the first steps might be.
Thank you,
Kate
Hi Kate,
Take a look at this thread.
https://www.propertyinvesting.com/forums/property-investing/help-needed/4324676
I think it is good advice generally considering the property market at the moment. There will be some good times coming to use your equity to purchase another property if that's what you want to do, but in my view ……………..not just yet.Not everyone will agree with me of course, but I'm holding off with the purchases at the moment myself.
Cheers
Owen Fox
Kate
Rather than paying off the loan you should be paying interest only and be utilising a 100% offset account.
Whilst accessing equity will help you in your goal to purchase another property the underlying factory is serviceability.
Make sure that you structure the loan correctly otherwise you may have an issue or 2 when it comes to lodging your Tax return and trying to apportion the deductible interest.
You mortgage broker should be able to assist in this respect if he or she is investment orientated.
Richard Taylor | Australia's leading private lender
OK.. thanks for the advice. This is still very new to me so I appreciate the advice.
What I don't get is…surely paying off the loan is a good thing? I have a standard fixed loan for 5 yrs. The rate is low. I pay off more than I need to. I thought paying off the principle was a sensible idea?
Then when I'm ready (after the predicted market crash if you follow the thread mentioned above! ) I've got a fair bit of ready cash sitting on the loan?
Hi Kate
I am guessing your apartment is your PPOR? If its your PPOR, I always advise trying to pay this off as quick as you can, as the loan is not tax deductable. The bank will look at if you can service the loan. In your case, you have only saved for a deposit, you may be up for mortgage insurance if your LVR is more than 80%. Be wary of trying to service two loans, as you mention most cash goes into paying your apartment. Without knowing all the circumstances, and it seems like you have answered your own question, trying to pay off your first home is a good goal (or at least making a bid dent in it.
PS. where in Melb you did purchase?
Geesh I'm so green….PPOR? Uhm it's my first property, I live in it. It's in St Kilda …art deco…. 2bdrms.
Thanks for your help. I'm not keen to overextend myself … I thought it might be an idea to use the equity to buy a studio or cheap 1 bedder in the area which, if I save up 20% deposit covering mortgage insurance (by working a bit more)…might increase nicely over time….or something like that….
Then I read the forums and people seem to be doing all these amazing things with taxes and special loans and I just wonder if there are smarter ways to use my $$$ to end up in the house I want.
PPOR = Principal place of Residence, its primarily a tax related term which will decide whether or not you pay capital gains tax (CGT) – another acronym, when you sell the property… I am not a tax adviser, but in general you don't pay CGT when you sell your PPOR.
LVR = Loan to Value Ratio its basically your loan amount divided by the property value, you always want it to be less than 80% or you pay lenders mortgage insurance (LMI) – look more acronyms!
LMI = Lenders mortgage insurance, this covers your lender in the event that you don't meet your repayments and default on your loan. absolutely ZERO value to you or your family, avoid if possible.
Hate to disagree with what other forum members have written but normally I would recommend an Interest Only with a 100% offset account for clients and their PPOR loan.
There
Richard Taylor | Australia's leading private lender
Hate to disagree with what other forum members have written but normally I would recommend an Interest Only with a 100% offset account for clients and their PPOR loan.
There
Richard Taylor | Australia's leading private lender
Hate to disagree with what other forum members have written but normally I would recommend an Interest Only with a 100% offset account for clients and their PPOR loan.
There
maybe
Richard Taylor | Australia's leading private lender
I'm sorry if you thought that was the end of the story…
Can I just check that I've got it….
Richard you say 'serviceability'. Do you mean my ability to manage two loans?
If an offset account that is interest only means my loan is more 'serviceable' does it mean:
- I am paying less on mortgage 1 therefore I can handle property 2 better
The underlying principle of an interest only loan escapes me! Though I understand that there are some benefits in making the tax easier to calculate.
If property prices are all increasing (decreasing) at pretty much as the same rate….then in five years if I sell two apartments to buy one house using this strategy I'll be no further ahead because I've really made no additional payments to increase my actual wealth but will have only paid the minimum on the loan… oh dear…I think I'm just confusing myself…
Hi Kate
What Richard is trying to get at is if you only pay the interest, then that leaves any spare cash available to service your second loan (if you get one). ie. have a friend who purchased a property for 72k in the early 90's, now worth about 450k at least, he only pays the interest on the property (and it ain't much on 72k), with the spare cash he had, he bought another investment property for 150k a few years later, now worth about 450k also. He worked out that by paying interest only instead of payign his property 1 off then purchasing another, he thinks he is ahead by 300k due to growth. But, this assumes growth, which you should get in the mid long term (and sometimes in the very short term). It all depends on your risk appetite. In your situation, you need to work out if your cash left over after paying the interest on your first loan (as principal will be next to zilch on a 30 year loan), will that cash be enough to cover your second property. I have seen this strategy work very well but also very bad for those new in the game if things go wrong. You nee to work out how much risk you want to take.
Hi Kate
Maybe I will clarify what i was suggesting:
1) If you set the loan up from day 1 as a P & I loan and then 5 years down the track decide to move to a bigger home but want to rent out the old PPOR the only interest that is tax deductible is the amount charged on the balance outstanding. You cannot redraw or refinance and try and cliam the additional deductions.
2) If you utlise an offset account with an interest only loan the net interest effect is the same as it would be with a P & I loan however you have the choice and flexibility. If you decide to do as we suggested in 1) above you would switch the offset account to your new PPOR loan and the interest on the full amount of the orginal loan becomes deductible on the old PPOR.
3) If you do not have enough equity and have cash sitting in your offset account and are wanting to purchase new IP then certainly you can pay down the capital and then take out a new LOC on the original property and use this to cover the deposit and acqusition costs on the new IP. The interest on the IP loan and the LOC is deductible as it satifies the TAO "Purpose test".
Whatever you do whilst you have a loan on your current PPOR do not use cash as a deposit and where possible try and avoid having the loans X collateralised.
If you start off with good habits they will last you a lifetime.
Richard Taylor | Australia's leading private lender
Have your house valuated by at least 3 real estate agents. Don't tell them you want to sell it ( because they won't be honest about the real price ) , just tell them you want to use the equity for a new house.
Chances are that the real estate agents will be honest to you and tell you that your property 'might devaluate' to 20% in the short term and advise against getting equity. Also talk to your bank before you do anything, ask them if it's a good idea to buy a house from equity at current interest rates. Don't 'just buy' , get informed about the real value of your house, not what a real estate wished he could sell it for ( they earn more money if they sell your house for more money ).Especially talk to the bank, they usually love it when you come to them to ask them for advice, instead of morons coming in with huge plans and then 2 years later have put themselves ( and the bank .. ) in debt unnecessarily. Don't speak with a housing guy at the bank, speak to the mortgage guy. ( usually the ones in black suits in the back of the bank in little offices with Ikea furniture and a coffee machine on the desk ).
If the bank truly believes in you, and is happy to give you a loan on your equity in these circumstances, then you should think about orienting on the market. If the bank is hesitant or tell you that it's better to wait a little bit before you do anything, then take their advice and wait.
If you decide to take up the equity, then get a 10-year fixed mortgage rate. This rate will reflect the risks of the future. The more risk, the higher the interest rate. There's a reason the interest rate is high at the moment : There's big risks in housing investments at the moment.
There's also the risk of inflation , which might cause you to get unemployed if it gets bad. Talk to your bank, have a coffee and take your time to get a real valuation. Maybe even get your house details and the details of the investment property with you : the more you discuss with your bank now, the less trouble you might get into at a later stage. You won't make friends with the bank guys, that's not their business, but you might get their support because they see you as a sane and trustworthy, smart investor, which really helps in the long run.
Scamp wrote:Don't tell them you want to sell it ( because they won't be honest about the real price ) , just tell them you want to use the equity for a new house.
Chances are that the real estate agents will be honest to you and tell you that your property 'might devaluate' to 20% in the short term and advise against getting equity.Also talk to your bank before you do anything, ask them if it's a good idea to buy a house from equity at current interest rates. Don't 'just buy' , get informed about the real value of your house, not what a real estate wished he could sell it for ( they earn more money if they sell your house for more money ).
Especially talk to the bank, they usually love it when you come to them to ask them for advice, instead of morons coming in with huge plans and then 2 years later have put themselves ( and the bank .. ) in debt unnecessarily. Don't speak with a housing guy at the bank, speak to the mortgage guy. ( usually the ones in black suits in the back of the bank in little offices with Ikea furniture and a coffee machine on the desk ).
If the bank truly believes in you, and is happy to give you a loan on your equity in these circumstances, then you should think about orienting on the market. If the bank is hesitant or tell you that it's better to wait a little bit before you do anything, then take their advice and wait.
If you decide to take up the equity, then get a 10-year fixed mortgage rate. This rate will reflect the risks of the future. The more risk, the higher the interest rate. There's a reason the interest rate is high at the moment : There's big risks in housing investments at the moment.
There's also the risk of inflation , which might cause you to get unemployed if it gets bad. Talk to your bank, have a coffee and take your time to get a real valuation. Maybe even get your house details and the details of the investment property with you : the more you discuss with your bank now, the less trouble you might get into at a later stage. You won't make friends with the bank guys, that's not their business, but you might get their support because they see you as a sane and trustworthy, smart investor, which really helps in the long run.
My goodness where do you start, I'm wondering if a good prerequisite is that if you're going to give advice about Australian banks you might have actually have walked into one and maybe even taken out a loan or something like that. Can't say i've ever bothered to do that, who does these days?
1. Real Estate agents doing something for nothing and being honnest about an appraisal, forget about it.
2. Chances are 3 out of 3 agents will laugh and hang up (comedy central)
3. If you're taking advice from a bank give the game away now!
4. I'll never forget the day a senior lending manager from one of the big 4 banks asked me for property advice, aim for that!
5. If you're going to take advice from a bank ask the employee how much they pay a week in rent.
6. 10 Year fixed mortgage rates at what 9%+ weren't interest rates 5%+ in living memory isn't the economy slowing enough already
7. Anyone keen on paying for a valuation
8, Housing guy/Mortgage guy you'll be luck to get a bank employee who owns in IP to start with – Do banks bother to still lend face to face?Right. i think I have it now! Thanks one and all…
How would this be for a strategy.
1. Get my PPOR valued. I can either pay for someone to do that or get a freebie valuation perhaps from a variety of real estate agents
2. Find out if I can switch my loan to offset and interest only (but make a decision if I'm confident enough to release my 5 year fixed rate which is cheap as chips first). If a am…
3. Speak to the banks and get a feel for their confidence in my ability to pay off the 2 loans
3. Work out what additional $$$ that frees up and consider an IP.
4. Do 3 only if I can cover possible interest rated hikes in a somewhat uncertain market
5. If I don't do this now then invest the extra $$$ in shares (or elsewhere) and wait a couple of years until things stabilise
6. When the time is right buy the 2nd property which as cadan says is a good strategy IF you're covered for the things that could potentially go wrong.Thank you so much everyone; I think I'm a bit less green now!
add me on msn, would be keen to know how you go
Qlds007 wrote:Hate to disagree with what other forum members have written but normally I would recommend an Interest Only with a 100% offset account for clients and their PPOR loan.
There
Richard can I ask why you would suggest this for the mortgage on a PPOR ? I thought that that type of loan was really used for IP's more so.
From calcs I've done with our mortgage at an Interest Only Loan we'd end up paying back in interest an extra $300,000+ for the term of the loan even though the repayments are less per month than what we currently are paying.
The though of doing this had crossed my mind, becuase we have now lived in our PPOR for more than 12 months which would significantly reduce CGT if we were to have it as an investment and sold later on.
Look forward to your reply
With 100% offset it doesn't matter whether your cash is in your offset account on or on the mortgage, as any money in offset account reduces the interest paid on mortgage.
I guess its better to have it in an account u can easily access than redrawing off the mortgage.GlenNess wrote:Qlds007 wrote:Hate to disagree with what other forum members have written but normally I would recommend an Interest Only with a 100% offset account for clients and their PPOR loan.
There
Richard can I ask why you would suggest this for the mortgage on a PPOR ? I thought that that type of loan was really used for IP's more so.
From calcs I've done with our mortgage at an Interest Only Loan we'd end up paying back in interest an extra $300,000+ for the term of the loan even though the repayments are less per month than what we currently are paying.
The though of doing this had crossed my mind, becuase we have now lived in our PPOR for more than 12 months which would significantly reduce CGT if we were to have it as an investment and sold later on.
Look forward to your reply
One of the main reasons i would recommend a IO loan on your PPOR is what starts off as your main residence can often end up as an IP as your outgrow the property and want to upsize.
I have seen so many clients pay down their PPOR and then decide to buy somewhere else and assume that they can either redraw or take out a new loan on the original PPOR and the interest will be tax deductible. Of course this is not the case.
If you keep it as an IO loan with 100% offset you can merely switch the offset account to the new property and retain the original loan balance on the old PPOR. The full interest on the original loan balance is deductible.
Richard Taylor | Australia's leading private lender
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