I wonder if 'capatilizing interest' is viewed as investment or consumer spending by the banks.
Up to this point,I have only used my LOC for paying shortfalls on mortgage payments.I prefer to do this rather use my wage money.I know this is only good if property prices increase.
Dont know if there are too many LOC's where Capitalising interest is possible now. Still, easy ways to trick most the banks systems. Just set up a direct debit to draw the interest payment out of the loan and back into the same account. Most the lenders systems will recognise the minimum repayment has been made, and in effect you are capitalising the interest. The beauty of internet banking!
Hi; We just capitalised our interest in advace for 12 months 100K + for one property. But we also are cross collateralised and also have properties in our SMSF of which we have paid out with good cash flow so the bank is happy to accomodate us.
I would also say that the days of securitised loans are over and if you do not have a huge amount of equity then you are going to struggle. The key is your debt to equity. If you can keep it below 30% your laughing. Early in your growth phase try to pay off as much of the principle. Yes you pay more tax and yes your growth in acquring more property is slower but over the long term your solvency pulls you through the tight times.
You make your profit when you buy not when you sell.
Limited Recourse wrote:Hi; We just capitalised our interest in advace for 12 months 100K + for one property. But we also are cross collateralised and also have properties in our SMSF of which we have paid out with good cash flow so the bank is happy to accomodate us.I would also say that the days of securitised loans are over and if you do not have a huge amount of equity then you are going to struggle. The key is your debt to equity. If you can keep it below 30% your laughing. Early in your growth phase try to pay off as much of the principle. Yes you pay more tax and yes your growth in acquring more property is slower but over the long term your solvency pulls you through the tight times.
You make your profit when you buy not when you sell.
Sounds like you've done well.
One question is- do you think that paying off as much of the priciple early on (or any time) cost you money in the big picture?.
I say this because this money can be used as a deposit for an additional property.30% LVR's seems very consevative and a very low risk tolerance.I was told that a 60% LVR is a point that banks are very willing to provide Line of credits against properties even when debt to income is lowish.
[Sounds like you've done well.
One question is- do you think that paying off as much of the priciple early on (or any time) cost you money in the big picture?.
I say this because this money can be used as a deposit for an additional property.30% LVR's seems very consevative and a very low risk tolerance.I was told that a 60% LVR is a point that banks are very willing to provide Line of credits against properties even when debt to income is lowish.[/quote]
Yes 30% is very conservative. In the good times 1996 -2000 and 2003 to 2005 we use to gear up to 120% for a new property using our collateral from our existing investment properties.
In every property cycle there are times when banks will refuse you further finance. The old saying from Alan Bonds heyday you have a problem if you owe the bank 2 million dollars. The bank has a problem if it has loaned you $250 million dollars
At this stage of the property cycle we feel its prudent to sit back and be conservative. Our number one priority is to remain solvent
Limited Recourse wrote:[Sounds like you've done well.One question is- do you think that paying off as much of the priciple early on (or any time) cost you money in the big picture?.
I say this because this money can be used as a deposit for an additional property.30% LVR's seems very consevative and a very low risk tolerance.I was told that a 60% LVR is a point that banks are very willing to provide Line of credits against properties even when debt to income is lowish.
Yes 30% is very conservative. In the good times 1996 -2000 and 2003 to 2005 we use to gear up to 120% for a new property using our collateral from our existing investment properties.
In every property cycle there are times when banks will refuse you further finance. The old saying from Alan Bonds heyday you have a problem if you owe the bank 2 million dollars. The bank has a problem if it has loaned you $250 million dollars
At this stage of the property cycle we feel its prudent to sit back and be conservative. Our number one priority is to remain solvent[/quote]
I think that is wise.
I have found that in this part of the cycle that banks are very reluctant in refinacing my properties,even when I have more than 20% equity in all of them.Changing careers to a lower paying job has not helped but I am going to fight tooth and nail and try not to sell one of them.Will need to live quite consevatively for a while until I build up work history and hopefully bank criteria loosens a little.
Do you think that bank criteria on lending will loosen in the next year or two at all? I'd love the old equity loan to return but thats probably wishful thinking.
If you go to the Somersoft forum and look up Living Off Equity there are a few people following that strategy. The consensus seems to be that it is becoming more difficult (with credit squeeze etc).
I think it all comes down with what you are comfortable with. If you are able to currently organise a LOC for lets say $550000 (5 x $100k plus interest) then this would buy you 5 years worth of income and provided that as you say you properties are in high growth areas, then in 4.5 years time you could then try to re-finance and if the bank says no or the growth has not been big enough then you still have a plan B- The option of selling one or two of your properties to fund further income / reduce debts.
I have been using my line of credit to pay for all of our investment property expenses excluding interest, therefore effectively making them all cash flow positive (Approx $200 per week) as this is what I am comfortable with. While $200 might not seem like a lot of money, when you are on an average income it does still make a big difference to our family (e.g. Annual holiday cost $5-$7000K and a restaurant meal at least once a month) what more could I ask for. Based on my projections I can do this for the next 6 – 8 years even if the property prices stayed stagnant.
I hope you too can find the right balance as I have found it is achievable to create some lifestyle improvements while still holding down a full time job. If I had at least $2million in equity and was considering your scenario I would only feel comfortable taking no more than 5-7% of the total equity p.a. but that is just me.
Good luck
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