New investor – loan structure

Hey Franky

I note you mention you have 180k of equity. Understand there is a difference between Equity & Usable Equity. In most cases lenders will allow you to access up to 90% (if you're happy to pay mortgage insurance) of your existing property vaule (held, not purchasing). So in your case if your PPOR is "valued" at $650,000 and your debt/limits are $470,000 you'd have approx $115,000 Usable Equity.

So you could keep your existing loan (as P&I or restructure it to Int only – there are pros's and con's to both). Then setup a secondary loan (secured against you PPOR) to access that ($115,000 – this would best be setup Int only) again assuming you're happy to pay LMI to access more capital/cash? These new funds can then be used as "Deposit(s)" for your new IP purchase(s). As the loan will be interest only you'll only pay interest on the funds drawn for "deposits/costs" (so if you don't use all of the $115,000 you're not going to pay interest on the money you don't use). You'd then setup different loan(s) (as Jamie mentioned) for the IP property purchase (and future property purchases). These loans can be secured up to 95% of the new purchase property value (plus LMI), depending on the security type and location. Your 5% deposit, plus purchase costs will come from your $115,000 loan. Remember by only putting down a 5% deposit you will pay the highest LMI premiums (the more deposit you put down the lower the LMI premiums will become). Some people believe "cash is king" and are happy to pay more in LMI costs to hold onto more cash at bank. Others think LMI is a waste of money, and try and avoid paying it (by putting in a larger deposits). Remember if you only use the cash from the $115,000 loan for "investment purposes" the interest that you pay on the loan should be tax deductible (caution, I'm not an accountant, so do your own home work). But just don't mix up personal expenditure (like I wana buy a new car or go on a holiday) from this account.    
 
Agree with Jamie, the first Brokers comments seem strange and not in your best interest.  

A good broker should be able to take you through the Pro's and Con's of the above. As again it's just a starting point.

Best of luck!!!

Yep you're right paying down non deductible debt should be a priority. Not saying you shouldn't do this. It's just you want to quarantine your non deductible debt and deductible debt. So you should have seperate loans for this. If you had $50,000 cash – you'd pay this off your "home loan" and then create a seperate loan to reborrow it to use for investment (hopefully without LMI). That way you've paid down your non deductible debt and released equity for investment purposes.

Unfortunately you'd pay LMI on the total amount. Hence my comment (assuming you're happy to pay LMI). Again if you're a "cash is king" investor you may want to release as much cash/equity as possible. But others want to avoid it, as it can be expensive. It's about finding the balance that's right for you.

That's a little complicated…but yeah drawing a picture would help . Effectively you're paying LMI on all the loans (assuming your borrowings are greater than 80%). But by not cross securitising your properties you can keep the LMI premiums lower. If you remain with your current lender (and you previously paid LMI) you may be able to structure the loans so you only pay an increased premium for the new borrowings (again more complicated, but may be possible). This could save you some money. Also remember the LMI costs may be depreciated (assuming they form part of your setup for investment). So there could be some benefit returned aside from having access to additional capital/cash.

Yes definitely get a good accountant (and good broker). Best to get these things in order before you put your offer in.

Sorry I'm based in Perth, but I am sure there's a few reputable Brokers in Sydney on this site.

Hi PF,

Yes, by reducing your P/I loan and the investment loans staying as IO this will help improve your cash flow.

The subsquent purchases can have the deposits funded by equity in both your PPOR and IP's. 

Regards

Gibbo

No problems, you’re starting out, one of the best things to do is – ask lots of questions until you understand J  Yes that’s a common strategy used (paying down PPOR debt, to release equity for investment). The unfortunate downside is, by paying down your PPOR debt the property you’re currently in may not make a good investment property in the future (another topic, but worth discussing with your advisor/broker). Remember you don’t have to migrate the available equity immediately, but paying down your PPOR loan you’re going to have the option to release this equity when/as needed for investment.  Unfortunately, many investors need to rely on their PPOR equity to build their portfolio. It would be great if you didn’t have to, as this would reduce your exposure/risk.  But in reality, the equity has to come from somewhere (unless you have a heap of cash lying around).  But the good news is, in the future you may be able to become less reliant on your PPOR equity as your investments (hopefully) grow in value. So to answer your question yes you can release your IP equity down the track.

Jamie,

I agree with you on the structuring of the loans; however, I have a question for you myself.

Should Franky set up an 100% offset account against PPOR?

So the structure would look like this:
1. Current loan against PPOR + 100% offset
2. IO equity release against PPOR (used for deposit/costs on IP)
3. IO loan for IP

Ta
Heath

Hi Heath

You are just about there.

As Jamie mentioned if you think one day you might move out and rent out your current PPOR then go IO on the PPOR loan.

If not then P & I is fine.

Cheers

Yours in Finance

Thanks Jamie!!
I had an idea that was the case, I guess the question was more for confirmation purposes.

G'day Richard, how are you?
Yes mate, We have no real plans to move out just yet but will eventually turn the P&I to an I/O sometime down the track.

Cheers guys

Heath