Taking equity from current PPOR for buying IP

Firstly congratulations on even thinking about buying an IP!!

Secondly 99.99% of the time- NEVER sell!(there are time whens its applicable though)
it just cost too much, capital gains, mortgage break fees, agent fees…….(long list)

Equity release is usually the best way however everyone's situation is different.
based on what you have estimated you have a loan to value ratio(LVR) of only 65%=
(360 divided by 550)

Income and expenses dependent you could increase this up to around 90-95%
495-522.5k  minus current loan leaves about 135k to play with.

This is enough to buy many IP's and leave some for servicing until rents increases and value adding
pay more of loan repayments…

If you have a lending quote done make sure you use a broker(not a bank) who specialize in investment loans
and have property investing knowledge.

This is a great place to learn lots from some really well educated people who are active investors!

$1500 fee is way too much to pay. I would bite the bullet and get out of that lender now. Otherwise you will face the same problem every time you need more money.

Gidday Julito,

Firstly, the rate you have is okay if the loan is full featured, but it's a shagging if it's just a basic loan.

You can get a number of pretty good pro-packs for similar money and less. Most of these would execute your 'top up' for a couple of hundred dollars, so I am guessing you're on some kind of basic or intro (which is are virtually all basics with some honey for the bees).

However the most important step to consider taking is having your property professionally valued before you do anything. (i.e you pay a licensed valuer vs. getting a real estate agent to do a 'free' property appraisal)

This gives you a more solid feel for just how much equity you have realised and will be able to release. This number will be a key driver to many decisions including switching lenders, how much you can buy for etc. so it is a good starting point.

Gidday Marwoto,

The fact that your loan has an offset account (provided that's what it actually is) suggests you're on a pretty fair wicket,

The fact that your lender is going to slug you for the top up is a little disappointing.

The next step is up to you, if the val holds @ $550K, you can, as you pointed out, get $80K out which means you can purchase at $400K (less costs) without worrying about LMI.

So can you make your IP purchase for that amount? i.e.can you find the right property with the capital gain and yield returns etc.

More importantly, although you get rental income, make no mistake that you will be almost doubling your debt so make sure you have done your numbers right to avoid winding up in the toilet.

Stay mindful that over the last 15 years, good variable rates (SVR) have averaged at around 7.09%, but spiked at 9.9% and in the last 5 years they averaged around 7.17% and peaked at 9.02% and you are thinking about this move at a time when interest rates are at record lows.

Although not an exhaustive list, here is some food for thought:

1. Find out how much equity you really have and remember to allow plenty of buffer for rate increases.

2. Think about fixing rates on the investment for the medium term.

3. If you find yourself daring enough to wander into LMI territory again, do it on the investment property.

4. Think about shopping the investment loan to a different lender and even if you don't, make sure you don't cross-securitise (sometimes called cross-collateralising).

5. Make sure you declare your top up as 'investment purposes'.

6. Keep the 'top up' as a separate split.

My question exactly Terry.

My feelings are it is not a true offset account but an redraw offset.

Be interest to know who the lender is.

Gidday again Marwoto,

Ratebusters is a mortgage originator which, if it was in the UK, would be called a single tied mortgage broker. They are definitely an intermediary for the lender, not the actual lender. However the risks and benefits of how a mortgage originator operates are different to your run of the mill mortgage broker (no offence intended on the 'run of the mill' comment fellas).

I was going to guess you had the Fee Buster, but didn't want to get into brands here. I can't remember who that product went back to in 2007, but if you really want to find out who the actual lender is, just check your actual mortgage documents.

The bad news is you miscalculated on this loan, paid a hefty upfront fee to get in; have an okay headline rate, with shaggingly poor flexibility (or okay flexibility with shaggingly high per use fees). And for the moment you're probably a little locked in. If you wind up doing top ups, be wary on resetting the penalty clock.

Your headline rate of 4.87% hides the effective cost of your loan which is well higher that 5%.

For example, you're less than 3 years into the loan and you paid a 0.66% loading to set up (without mentioning the other massive setup costs).

This means using even the simplest of math, your effective rate is over 4.87% + (0.66% / 3) so 5.09%. Now I say over 5.09%, because you also paid that money upfront so when you add the time value of money, which I didn't do to keep the math simple, blergh.

Anyhow, spilt milk there I'm afraid, so let's keep moving forward.

I interviewed a fellow from RateBusters some time last year (his name escapes me).  We were talking about the offset account, because it's operation intrigued me a little as the lender was not an ADI. Anyhow, to cut a long story short, what he told me is that the offset account can sometimes go out of whack and not offset properly.

That's the bad news. The good news is, if you pick up offset errors and let them know, they will fix it. Other than that, it's an offset account.

Nonetheless, I think it might be an idea to get some financial advice BEFORE you do anything else (and I don't mean from a commission based financial planner) because it doesn't seem you have  a very robust plan in place, or the experience to put one together on your own. If you have managed to build your equity as you believe, then it would be a shame to blow it with a bad decision made with too little knowledge and too much dud information.

This is an interesting forum and offers valuable input, but it's not the place to use as foundation block for that type of knowledge.

If you have a spare $30, take a look at barefootinvestor.com and think about picking up Scott's book. His book is a best seller, has a nationally syndicated newspaper column etc. Most importantly, he's a good guy.

Tough first lesson on the first loan, but the upside is you've built some equity in spite of it, with very little money down. Make sure you get the next move right.

Thanks Richard, it was too late in the day when I responded, I kept getting stuck on Maxis.

Although I agree that the offset seems to be doing very little if anything for Marwoto, this a combination of his knowledge, lifestyle and investment choices rather than support for your blanket generalisation that it's not a 'true offset'. Not to mention that there is no legal definition of what a 'true offset is'. I think your comment is misleading and unnecessarily disheartening to Marwoto.

Same too for flaming mortgage originators, or even Ratebusters for that matter. Although I'm not their biggest fan, it's hard to deny that for the right borrower profile it would be one of the top 10 picks and probably in the top half of that small field. It's just that Marwoto isn' t 'that' borrower. Horses for courses.

So the problem isn't so much with Ratebusters or their product, it is with the way that Marwoto compared, chose and now utilises his solution. With so much contradictory information out there and wild generalisation, it is no wonder Marwoto and people like him turn to rate, perhaps taking some support from media awards and industry recognition. Quite simply, his approach fell well short of a considered and proper comparison process. Hence my recommendation that he get some real, professional advice before moving ahead.

A final thought on originators. Like mortgage brokers, originators have and continue to play an important role in maintaining and increasing competitive tension in the market. This drives both product innovation and pricing competition, which  in the end benefits borrowers.

Figure out a way to get rid of originators and my guess is that mortgage brokers will be next on the list, followed closely by an end to the already limited pricing competition. I'm sure the big 4 are working on it.

Okay Richard, just a couple of quick corrections on your information.

Contrary to your assertion, It is not illegal for a mortgage broker to comment or even advise on any type of mortgage offset facility, provided they belong to an ASIC approved EDR (External Dispute Resolution) scheme such as COSL or FSO.
 
It's been that way since before brokers came about and was reaffirmed by ASIC in 2003 with the formalisation of the FSRA (except of course the FSO was the BFSO back then). The ASIC media release can be found here: http://www.asic.gov.au/asic/asic.nsf/byheadline/03-388+ASIC+grants+relief+in+relation+to+mortgage+offset+accounts?openDocument

In terms of your offset references, you seem to have strayed from the original term that I thought of as misleading. That is 'true offset' or to put it in your words 'not a true offset facility'.

There are two offset facilities that Marwoto has available to him under his present structure and lender. The loan itself and the other, admittedly more mysterious offset account.

Both of these facilities offset as legally defined, which was one of my points. And both of these, according to Ratebusters offset daily balances (barring the system glitch I mentioned earlier – which may or may not have been fixed by now). So Marwoto should be able to feel okay about them, which was my other point.

Whilst I respect your experience, if you take enough issue with calculation ,methods, fees etc of the Ratebuster product as to put Marwoto's choice down so harshly, why not be specific so all readers can understand what you mean. Point out the facts, the detail that forms the basis of your assertion.

Why not explain how neither of these facilities qualify, in your opinion, as a 'true offset facility'.

Be a part of the solution, rather than a part of the generalisation problem and certainly don't just become another spruiker for 5 of the Countries top bank lenders. They're big enough and loaded enough to do that themselves.

And for the record, I'm pro-borrower before I'm anything. And I'm not a mortgage broker or a financial planner.

But enough about me, what exactly is the shortcoming that you see with Ratebusters offset facility?

Julito

Where are you based.

As a Financial Planner with PIS one of the Country's largest Financial Planning Groups i maybe able to point you in the right direction depending on where you are based.