Hi Investors!
(First post)
I'm currently in the process of buying an investment property and I'm trying to work out the 'mechanics' of financing against our PPOR, so bare with me!
We have built up about $180K of equity in our PPOR. The investment I'm looking at is under $100K so no dramas there.
My broker is working out some strategies to do this, for future investment purposes and also ensuring our lender will approve.
Now what I don't understand is (and it only occured to me just now), how come we are going through a lender when we have usable equity to borrow against in our PPOR? Isn't it just a case of going up to our current bank and getting them to write a cheque type thing?
OK let's call your current bank BANK A. Let's call a different bank BANK B.
Yes you could go to BANK A to release equity.
Or you could go to BANK B who might either take a second mortgage out against your house for the $180k, or alternatively BANK B might pay out the entire loan with BANK A and start the loan all over again.
Be sure that you don't end up with a loan that has two properties listed as security against the one loan (ie the new IP and also your PPOR). This is called Cross Colateralizing. Just imagine what would happen if you had some trouble making your loan repayments. One bank could seize not one, but both your properties. Not a good situation.
Hope this has helped explain things a little bit. The brokers will jump on and give you a more precise explanation shortly, I'm sure.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi Desability
I am sure your Broker will explain the strategy he is putting together for you and as long as he is not cross collateralising the 2 securities well all good.
On a different tack what sort of investment are you making for under 100k?
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
dezability wrote:Now what I don't understand is (and it only occured to me just now), how come we are going through a lender when we have usable equity to borrow against in our PPOR? Isn't it just a case of going up to our current bank and getting them to write a cheque type thing?
Hi and welcome aboard
There's a couple of ways to do this.
Most bankers and a lot of brokers will simply cross collaterise your home with your investment. They do this by taking your home and using it as security for your investment property. This isn't ideal – it gives the bank too much control of your assets. It's great from the banks perspective but not yours.
The best approach is to avoid cross collaterisation and avoid using your home as security for your investment.
To do this, you'll need to have three loans set up. The first is your current home loan, the second is an equity release against your home (which covers the deposit/costs on your IP) and the third is the investment loan.
So for illustrative purposes, let's assume you're buying a $100k IP. The loans would be set up something like this:
PPOR
Loan 1: Your current home loan
Loan 2: $25k equity release to cover a 20% deposit and costs (such as stamp duty, etc) on your $100k IP
IP
Loan 3: $80k loan to cover the remaining 80% balance of your IP (this can be with the same or another lender)
Now this is just a general structure – and may need some tweaking depending on your circumstances and longer term goals.
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]
Have you previously paid LMI against your current loan?
Also how are you calculating equity?
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Wow, thanks for all the great help guys, this forum is amazing
Jamie M wrote:dezability wrote:Now what I don't understand is (and it only occured to me just now), how come we are going through a lender when we have usable equity to borrow against in our PPOR? Isn't it just a case of going up to our current bank and getting them to write a cheque type thing?
Hi and welcome aboard
There's a couple of ways to do this.
Most bankers and a lot of brokers will simply cross collaterise your home with your investment. They do this by taking your home and using it as security for your investment property. This isn't ideal – it gives the bank too much control of your assets. It's great from the banks perspective but not yours.
The best approach is to avoid cross collaterisation and avoid using your home as security for your investment.
To do this, you'll need to have three loans set up. The first is your current home loan, the second is an equity release against your home (which covers the deposit/costs on your IP) and the third is the investment loan.
So for illustrative purposes, let's assume you're buying a $100k IP. The loans would be set up something like this:
PPOR
Loan 1: Your current home loan
Loan 2: $25k equity release to cover a 20% deposit and costs (such as stamp duty, etc) on your $100k IP
IP
Loan 3: $80k loan to cover the remaining 80% balance of your IP (this can be with the same or another lender)
Now this is just a general structure – and may need some tweaking depending on your circumstances and longer term goals.
Hope that helps.
Cheers
Jamie
Bingo! This is actually the solution that my broker suggested and after studying the numbers, I am beginning to understand how this all works
Few questions,
1) Going from your example of Loan 2 equity release, will this interest rate be set at my Loan 1 rate? and would I be able to have flexibility on paying interest only for example?
2) And for Loan 3, could I negotiate the lender to match my current PPOR home loan rate?
3) I'm assuming costs will be tax deductible on Loan 3, what about Loan 2?
Sorry for all the questions, it's funny how they all pop up only when you leave the broker's office
TheFinanceShop wrote:Have you previously paid LMI against your current loan?Also how are you calculating equity?
No, we coughed up the 20% on our current loan to avoid LMI.
We calculated by taking the RP Data valuation and minused the debt we owe on the loan.
My broker gave me the option of having a full valuation done this week to get a better figure – I'm leaning towards this as it will reveal the true equity figure?? (There is about a 50-80K difference with that figure and what the market around us is selling for!!)
1. If it's set up as an interest only loan and not a line of credit then yep – should be the same or possibly lower if your broker can negotiate it down for you.
2. I usually get them to lower the rate on the new and existing loan on the premise that you're borrowing more.
3. If loan 2 is being used for investment purposes then yes.
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]
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