Hello there,
I have to say I am big fan of this forums, such a valuable information gets provided here.
I am newbie in proprty investing and potentially looking forward to financial freedom through property investing. My long term goal is capital growth from property investment rather than cash flow.
My House value currently is 375K and existing morgage is 258K, I want to use this quity of 117K to start investing in property. But I am not sure how this works and how much money can bank allow me to borow.
does bank allow me to borrow 80% of 117K or the calculation is different than what I am thinking? I am thinking of using my quity as deposit,stamp duty and possibly some buffer for interest payments on investment property.
any clarification on how do bank calculate money to lend on euity would be apericiated.
thanks in advance
Saurinsubject to your income etc, the bank will allow a total loan of 80% of the value of the house – maybe 90% with LMI.
To work out how much extra you could access just follow this forumula:
value x 80% – current loan.Make sure you get this equity as a separate loan, ie don't increase your current loan but get a separate one.
Then use this 2nd loan as deposit for the new property and get a third loan for the remainder.
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
Probably yes, bank calculate equity depending on the amount of your actual home you own. First you need to know the current market value of your home you also need to know the balances of all your mortgages. Typically most the banks will lend you a certain percentage of your equity.
To follow on from Terry, if you were to go to a larger LVR amount (say 90%), you would release $79,500 (and pay in the vicinity of $5,000 in LMI). At 80% you'd release $42K.
However if the valuation comes in higher then you might be able to release enough equity at 80% LVR and pay no LMI.Assuming you managed to release $79.5K in equity, you could then purchase an IP for approximately $320K (at 80% LVR) or as much as $500K (at 90% LVR). This assumes you'd purchase an existing property and pay full stamp duty.
Whereas if you released $42K, your investment purchase would be limited to approx $170K (at 80%) or approx $280 (at 90%).
saurin_83 wrote:I am newbie in proprty investing and potentially looking forward to financial freedom through property investing. My long term goal is capital growth from property investment rather than cash flow.
SaurinHi, just curious- What are you going to live on in your financial freedom without cashflow?
There are ways, I'm just curious as to how you plan to do it.
Hi there,
thanks heaps for your response.
Response to Terryw and Lincoln Haugh, My current income is 86K gross. It was very interesting that if bank allows me to borrow 90% compare to 80% then my borrowing power will change dramatically.
Terryw you have advised "Make sure you get this equity as a separate loan, ie don't increase your current loan but get a separate one. Then use this 2nd loan as deposit for the new property and get a third loan for the remainder." I am bit confused about this.
Let's assume that bank will allow me to borrow 90%, so most I can borrow as equity as 79.5K. and I buy the investment property 300K
Please confirm that my Loan srtructure would be something like this.Existing home morgage: 258K
Equity: 79.5K (which I'll use for deposit and stampy duty if possible) (wouldn't this equity will be added my existing morgage 258+79.5)
Investment property: 240K (I used 60K as deposit and 19.5K as stamp duty from equity 60+19.5 = 79K)
New Existing home morgage: 258K + 79.5KPlease advise if above could be aranged in any better way
Response to Catalyst, I am 27 years old plenty of time for retirement, I have read this book from Michael Yardney (how to grow mulmillion dollar portfolia in spare time) through this book I understood that over the time when I reach to retirement age I can use my equity as living cost (which would be tax free, ofcourse more debt) compare to cashflow (which will have taxon that). I recommend you this book. it goes in very details how to live off your equity.
thanks a lot for all your response.
SaurinThis is how I would do it.
Existing Loan, call it A, at $258,000 + offset account attached
Loan B, separate loan, at $79,500 Interest onlyFind a new property and take out
Loan C for 90% of the value, Interest Only
use loan B for depositLoans B and C should be deductible and this will keep your house from being used as security for the investment. Loan C could be at a different bank to Loans A and B.
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
makes much sense. thanks a lot Terryw.
Quick question as I am earning 86K a year and single breadwinner in house no kids. how much I can borrow or bank let me borrow for Loan C. Do bank really allow borrow 90% of value (specially in today's condition where lending is tight). also I recently done valuation of my home and bank advsied it is worth 375K, but bank advised me that they will not provide any documentation around this, only verbally they can tell me what it is worth? is this right practise?
thanks
Saurinyep, it would be unusual for a bank to give you a copy of the valuation. Sometimes you can get it out of them though.
You should see a broker about borrowing, but as a very rough guide you could get around 5 to 6 times your annual gross income in total loans – but would depend on a lot of variables.. up to 90% is still possible
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
some banks will allow you upto 95%
Hi Saurin
Terry's rule of thumb is about right however there are so many variables these days when it comes to serviceability the figures can change considerably from lender to lender.
Would need a wee bit more information to give you an exact guide.
Richard Taylor | Australia's leading private lender
Hi Richard Taylor,
thanks for you response. I am single earner in house, my wife doesn't work. I earn 86K gross. 258K existing morgage. no credit card. Please tell me if any other infromation you require to give meexact guide.
Hi Terry, I think your approach to arrange a Loan is not to do Cross Collateral (am I right?). But I have heard from people who tried to follow my scenario that bank refused to give them seperate loan as 79.5K (Loan
all they were offered was to top up their existing morgage (Loan A). It seems like bank forces consumers to cross collateral. what is the best way to get away with that. what is the criteria that bank follows and refuse consumers to not to borrow equity as seperate loanthanks
Saurinbanks usually don't have an issue – it is the non bank lenders with restrictive policies and products that muck things up. Its not really just cross collateralising that should be avoided but all the tax problems that will come with increasing a loan – you will essentially be throwing money away by ending up paying more in tax.
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
Hi Terry,
I understand that arranging loans differently would avoid cross collateralising as well as tax managemnet. If bank allows me to set up different loan for 79.5K (which I am planning to user for capital costs stampduty, morgage registration etc…). Is stamp duty and all other capital costs including deposits still be tax dedcutible? I thought stamp duty can't be tax deductible?
thanks
Saurinstamp duty and other capital costs are deductible against capital gains. You would also be able, usually, to borrow to pay the stamp duty and deduct the interest on this loan if it is for an investment property
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
Mortgage registration, Transfer, conveyancing costs relating to the mortgage only as well as application, valuation, LMI etc are all considered loan costs and deductible over 5 years or the term of the loan whichever is lesser.
Richard Taylor | Australia's leading private lender
Hi there,
thanks all for your response. I have some more queries about tax implications but before that I guess i need to structure my investment correctly.
I am planning to buy IP in Melbourne around 300K.
So far I understand I will arrange my Loan structure like this
Loan A : PPOR = 258K ( Existing morgage) linked to Offset 25K account (current market value of PPOR 375K)
Loan B : 79.5K (90% borrowed against equity)
Loan C: IP 240K (interest Only loan)From Loan B I would user 60K as Deposit and 19.5K as other capital costs (stamp duty, morgage registration etc..) If I understand your advise correctly I will be able to claim this in next 5 years in tax (does it mean 79.5/5 = 15.9K each year)? so it means if I earned 80K for next 5 years then only tax I would be on the amount of 80-15.9 K for next 5 years. is this corerct?
Also, As i have 25K in offset account which is linked to my PPOR morgage, I wanted to keep this 25K in offset as safe side like buffer for my IP? can this be used any other way to maxismise the benefits.
Also, 240K I have for IP property the interest on this is tax deductible. Please confirm if my understanding is right the way this will work is . My annual rental on IP is 20K and all outgoings including interest is 25K then I have negative cashflow of 5K a year. So in If I earn 80K that year the tax i would be paying on amount of 80-5K = 75K is that coerrect. I understadn that depericiation can be claimed as well over 40 years.
But I just want to confirm if I incure any loss through Property investment as well as capital costs using quity, it will be set against my annual income of that year, thus reducing my gross taxable income is that correct?
thanks
Saurinsaurin_83 wrote:Response to Catalyst, I am 27 years old plenty of time for retirement, I have read this book from Michael Yardney (how to grow mulmillion dollar portfolia in spare time) through this book I understood that over the time when I reach to retirement age I can use my equity as living cost (which would be tax free, ofcourse more debt) compare to cashflow (which will have taxon that). I recommend you this book. it goes in very details how to live off your equity.
SaurinThanks, I am well aware of the merits (and pitfalls of Living off Equity). I'd suggest doing a lot more reading than one book before assuming this is a viable road to take.
Remember we are in a time where some properties have seen NO growth in 10 years. Hard to live off that. Also we have been in a credit squeeze. You assume the banks will lend you money. When you are retired banks may decide not to lend you money based on equity alone. Just food for thought.saurin_83 wrote:Hi there,From Loan B I would user 60K as Deposit and 19.5K as other capital costs (stamp duty, morgage registration etc..) If I understand your advise correctly I will be able to claim this in next 5 years in tax (does it mean 79.5/5 = 15.9K each year)? so it means if I earned 80K for next 5 years then only tax I would be on the amount of 80-15.9 K for next 5 years. is this corerct?
hi
This part is not correct. Capital costs are not claimable until the property is sold. But you can claim loan costs over 5 years. any interest incurred on borrowings to fund capital costs or loan costs or other costs would generally be deductible against income each year.
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
Terryw wrote:saurin_83 wrote:Hi there,From Loan B I would user 60K as Deposit and 19.5K as other capital costs (stamp duty, morgage registration etc..) If I understand your advise correctly I will be able to claim this in next 5 years in tax (does it mean 79.5/5 = 15.9K each year)? so it means if I earned 80K for next 5 years then only tax I would be on the amount of 80-15.9 K for next 5 years. is this corerct?
hi
This part is not correct. Capital costs are not claimable until the property is sold. But you can claim loan costs over 5 years. any interest incurred on borrowings to fund capital costs or loan costs or other costs would generally be deductible against income each year.
Hi Terry,
Can you please explain the difference between the Capital costs and Loan costs with examples if possible. also, Can you please explain with exampe if possible interst incurred on borrowing for capital costs?
I am still not sure if Stampy duty can be claimed in tax or not, if I borrow this amount as equity will that be claimable?. I think all the capital costs releated to IP will be borrowed as equity so that can be claimed in tax or not.
thanks
Saurin
all they were offered was to top up their existing morgage (Loan A). It seems like bank forces consumers to cross collateral. what is the best way to get away with that. what is the criteria that bank follows and refuse consumers to not to borrow equity as seperate loanYou must be logged in to reply to this topic. If you don't have an account, you can register here.
