Hello all
I am a fairly new investor, with my first investment being a townhouse that I purchased 2 years ago and currently live in.
In January this year we had an evaluation done, and thanks to good timing and some work done on the house, it had increased by 50k. We then borrowed that 50k as a split loan and invested it into the share market, using one of the easy invest options from our bank.
Those shares have done quite well, and are easily worth quite a bit more than the 50k loan we have against them.
The question I have now, is if we were to say buy another investment property, would those shares count as capital? This makes a substancial difference as to whether we would be borrowing above or under the 80% threshold.
For instance, if we were to purchase an investment property, would the creditors consider our total potential capital as (current propert value + investment property value) or (current propert value + shares market value + investment property value)?
I rang ING, who we have our mortgage with, and they were unable to give me an answer.
So, can anyone clarify what is standard in the financial industry?
Many thanks
Hi there
Firstly welcome to the forum and I hope you enjoy your time with us.
I am assuming when you refer to the shares as Capital you mean either:
1) You will liquidate them and want to use them as deposit and wondered whether the lender will accept this as proven savings.
Answer – YES.2) You want to offer them as security and gear against the.
Answer – Subject to the Companies in which hold shares in you would be able to take out a margin loan against them and use this as deposit.
Limitations will be the amount you can borrow against them which realistically would be max 70-80% of their current valuation and the increased interest rate. Also need to consider how you would go in the event of a margin call.
Richard Taylor | Australia's leading private lender
Hello there, and thank you for both the welcome and your post.
I don't think I explained myself very well in my first post, so I will try with an actual example, using my situation
I have a townhouse valued at 360k, for which I have a current loan of $210k
I have shares values at $65k, for which I have a current loan of $50k
I do not have any marginal lending on those shares.
Both loans are with ING, in a split loan account. and therefore my total loan with ING is $260k
I would want to keep my current shares for then forseable fututeLets assume I want to purchase another property valued at $400k. For the sake of this scenario I will ignore stamp duty and other expenses, and also assume I have an income to support such a purchase
Scenario 1 – Shares can be used as capital
My current capital is $360k (house) + $65k (shares) = $425k, and I owe $260k. If creditors were to access my situation, they would consider that my new total loan would be $260K + $400k = $660K, and my new total capital would be $425K + $400K = $825K. Therefore in this situation I would be borrowing exactly 80% of my capital, which is a comfortable amount.Scenario 2 – Shares cannot be used as capital
My current capital is $360k (house), and I owe $260k. If creditors were to access my situation, they would consider that my new total loan would be $260k + $400k = $660k, and my new total capital would be $360k + $400k = $760k. In this scenarion I am now borrowing 87% of my capital. This is not as attractive to the lender, and I would be subect to mortgage insurance.Basically, I am not sure if the volatile nature of shares mean that creditors will not take them into consideration or not when accessing my finances. And if they don't, that means that shares become a lot less attractive, because everytime I borrow money to purchase them, my borrowing capacity would be going down regardless of how well the shares are doing.
Thanks again.
Hi again Kiwi
Ok in answer:
1) No a standard lender will not take your shares into consideration when lending for an new IP. You will need a separate marginal loan lender and this loan will taken out against the security of the shares solely. You can then use the funds as deposit for your IP.
2) Lender wont mind as you pay the mortgage insurance premium although they benefit from the policy.
Richard Taylor | Australia's leading private lender
Ok, thank you kindly Richard for the clarification.
The bank will look at the value of the loan against the value of the security. Your shares would be unencumbered so they won'play a part in the calculations.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
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