Hi everyone. I'm new to your great forum. I'm finding it hard to get my head around equity. I have read that banks treat it just like cash. If so does this amount get deducted from the loan amount or do the banks just lend against it and treat it as security. My wife and I want to buy our first IP. Our current position is PPOR $400,000. Current loan $150,000. Our combined income is $80,000. We have one dependant child. Looking at kicking off our portfolio in a regional area for positive cashflow around the $200,000 mark to start with. It would be much appreciated if someone could explain this to me in very simple terms. Thanks
A lender will lend you up to 90% (some times 95%) of the value of the property. At 80% LMI is not payable but anything over that is.
So if your property value is $400,000 then at 80% you have $320,000 in equity minus your current loan balance of $150,000 – the usable equity is $170,000.
Make sure the loans and properties are standalone and not crossed. Also ensure that all your income (include the proposed rental income) is going in an offset held against the PPOR loan.
Consider tapping all of your equity today even if you do not plan to use it all in the next purchase.
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
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"Consider tapping all of your equity today even if you do not plan to use it all in the next purchase."
Only if they are financially aware people. I've seen many people go down this path and end up with a boat and new car… Silly people. But it is a good financial back up for loss of work etc if your not insured or get dismissed or for medical.
Thanks for your response Shahin. Two further questions.1. How do the banks use the $170,000 in usable equity exactly? 2. What do you mean by tapping all of the equity? Sorry for not understanding but like I said I am new to all of this.
Hi Jude
Welcome aboard
I like your profile pic!
The $170k (if you were wanting to access that much) would be used to cover the deposit/costs on subsequent IP purchases. You'd then take out another loan for the remaining balance of each IP. So it would like like this (assuming you're purchasing a couple of IPs for illustrative purposes):
PPOR (your current home)
Current loan: $150k
Equity release: $170k (to cover 20% deposits and costs on each IP purchase)
IP 1
Loan for 80% of the properties value (20% deposit/costs coming from equity release against PPOR)
IP 2
Loan for 80% of the properties value (20% deposit/costs coming from equity release against PPOR)
Now – with that $170k equity release, if it's set up properly you can have it sitting dormant with no repayments payable until you actually start using those funds (ie. when you find an IP to purchase) – and even then, you'd only have to pay interest on the portion of the equity release that you use (you might not spend it all up at once).
The first thing to do is talk with a decent finance person about your longer term plans – they'll then run scenarios and advise on the correct loan structure. At this point – depending on the lender that you're currently with, they may also be able to order a free valuation on your property so you can find out exactly how much equity you can access.
Hope that helps.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi Jude
Welcome to the forum and i hope you enjoy your time with us.
Consult a investor based mortgage broker and he will structure it correctly for you so that you don't loose out when it comes to mixing loans or cross collateralising the securities.
Set up an equity loan secured against your PPOR loan and use the funds to put down as deposit on one or more investment properties.
Each loan will have different requirements so your Broker should be able to show you what suits your individual needs.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Jude13 wrote:Thanks for your response Shahin. Two further questions.1. How do the banks use the $170,000 in usable equity exactly? 2. What do you mean by tapping all of the equity? Sorry for not understanding but like I said I am new to all of this.You can draw upon the equity either by way of a line of credit or a standard variable product with an offset. With the latter – the funds would sit in an offset so no interest would be payable until the funds have been accessed.
However be careful of contaminating deductible and non deductible interest on the loan. There is a lot of things to factor – e.g. a lot of lenders will only allow for one offset and you may need a lender that can accommodate multiple offsets.
Tapping all the equity – accessing the funds at 80% so that you can use for subsequent purchases, renovations, etc depending on the strategy.
Who is your current lender?
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Probably best to place those funds back into the IP loan and redraw (for IP purposes only) when required as opposed to parking the cash in an offset.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks everyone for your responses. My current home loan is with Bankwest. They have talked about crossing the loans but said they didn't have to if I didn't want to. Does anyone know of a good investor based mortgage broker based in Melbourne. Also we are thinking of seeing Destiny Financial Solutions. I know theres an outlay of money for this but I figure it would be worth it in the long run as we are much less likely to make stupid mistakes. Theres so much to consider.
If you are going to build your portfolio – bankwest is not the best lender to start off with unless there is a specific reason that you are with them (such as if you are planning to construct 4 dwellings on a single title).
A good mortgage broker doesn't need to be in the same state/city as you but certainly if you prefer to deal with someone face to face then Tom on this forum can help you.
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Jude13 wrote:Hi everyone. I'm new to your great forum. I'm finding it hard to get my head around equity. I have read that banks treat it just like cash. If so does this amount get deducted from the loan amount or do the banks just lend against it and treat it as security. My wife and I want to buy our first IP. Our current position is PPOR $400,000. Current loan $150,000. Our combined income is $80,000. We have one dependant child. Looking at kicking off our portfolio in a regional area for positive cashflow around the $200,000 mark to start with. It would be much appreciated if someone could explain this to me in very simple terms. ThanksDo you really think regional property will be a good investment, even if positive cashflow?
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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