Hello Property Investing people I really want to learn about investing in property but I really want to know the basics 1st
-When I buy a house for $500,000 on a 25 year loan at 7%, I' will be basically paying $500,000 on interest lets say so over the life of the loan I will be paying about $1,000,000.
-So say I have paid off about $100,000 and I decide to sell the house, for $550,000 so I have $100,000 in equity + $50,000 = $150,000 to buy another house what happens to my mortgage??? Do I still have to pay it off the remaining interest on that mortgage or do I simply have two mortgages???
This must be a very amateur question but for me I actually don't know the basics???
Don't confuse a mortgage with a loan. The mortgage is the lenders interest secured over the property. The loan is the money lent.
You can only sell a property if the mortgage is discharged and title released. To get a bank to release the mortgage the loan needs to be repaid in full.
Interest only acrues daily and is added monthly. So if you have a loan for $500,000 and pay PI it will be slowly decreasing to $0 over 30 years. If you sell after 1 year for $550,000 the remaining balance may be $495,000 – or $395,000 if you made an extra $100k payment. This means you would be left with $55,000 or $155,000 in cash after the sale and discharge of the loan and mortgage.
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
Every property has a title deed which is a is a legal document used to prove ownership of a piece of property.
The bank you have your mortgage with will hold this title deed that will list you as the legal owner.
Once the property is sold and the debt extinguished then the title deed is transferred to the new owner and bank if different from your bank.
Whatever funds are left, in this case circa 150k will be disbursed to you unless the property is linked or cross collaterlised to another property/s and the bank decides to pay down some of the remaining debt which does happen from time to time.
Colin Rice | CDR Finance
http://cdrfinance.com.au/
Email Me | Phone MePerth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]
ok I am still confused, I have questions:
1. So if I purchase a $300,000 property and have a 20% deposit is that $60,000 in equity already???
2. So than I take out a loan of $240,000 over 25 years. If my loan was able to make extra repayments and I was suddenly handed $100,000 could I just throw the $100,000 in that loan amount which will decrease a big chunk out of the loan to $140,000. Would that mean I would just have to pay interest on the remaining $140,000 or from the overall $240,000 I borrowed???
3. If my property in one year increased to $320,000 and I have paid off about $15,000 of the principle which the remaining loan would be $225,000 I understand that if I sell it would cover that part but what happens to the rest of my loan ? the interest ?
I am so confused why don't they teach us this at school!!!!!!!!!!!!! I am sorry if this is a very dumb question but I am clueless I need a step by step on how things work.
Hi Newbie
All good
1) Yes, if you purchase a 300K property, and put down a $60K deposit, then you will have 20% equity. FYI the formula used to calculate equity is;
(Loan Amount divided by property value) x 100 = Equity %
2) The total interest payable is calculated on the loan amount only. So, if the loan balance is 240K, you will pay interest on 240K. If you then pay 100K lump sum off the loan and the new balance is 140K, then you will only pay interest on 140K.
3) When you sell the property, and pay out the loan all future payments will be nullified. Eg. If the loan balance is $0, then no further payments or interest is applicable.
Matt
Ohh thank you for that Matt, it makes more sense so if my principle balance was only 200k left I would only have to pay interest on that amount so if monthly I was making re-payments for say $2000 on a 300k principle would that mean for a 200k principle I'll be paying less monthly saying like $1600 etc…?
Hi Newbie
With a Principle & Interest Loan (P&I) where you pay the principle off over 30 years, the repayments are the same each week / month etc for the full 30 years.
So, although you will pay the maximum amount of interest in the first month, and then gradually less interest each month there after as the principal reduces, (and conversely, the least principal in the first month and then gradually more there after) the loan repayments remain the same for the full 30 year period of the loan.
If you were to pay 100K off the loan in a lump sum transaction, the repayments would still remain the same unless you were to approach your bank / broker and them them re-negotiate the payment terms of the loan.
Does that answer your question ?
Matt
Oh ok matt so saying if I did dump 100k onto my lump sum 240k i
Ill be still paying the same monthly repayments but just faster so instead of 25 years it might only take 10 years?? Am I correct so basically its much better having the bigger deposit??
thank you
Hi Matt
Bang on mate…
If your goal is to pay off the loan as quickly as possible, (to keep things very simple) then there is really only three ways to go about it;
1) Borrow less to begin with (bigger deposit)
2) Make lump sum payments
3) Make extra weekly / monthly repayments.
Please note, option 3 is better than option 2 (If you pay $100 per month in extra payments, you will be saving yourself more in interest then if you were to just pay $1200 in a lump sum every 12 months).
Thank you very much and above examples. I understand the concept now. Just 1 more question if my property was $300,000 and deposit was 20% and I sold for $320,000 would that mean I would of only get back $80,000 in total meaning I only made a $20000 profit? And my remaining loan would be included in that sale?
Thanks so much I am trying hard to get this
Doing well mate… yes, your correct.
Basic example;
Property Purchase Price = $300K
Consists of a) 60K deposit & b) 240K loanProperty Sale Price = $320K
Consists of a) Return of $60K deposit b) Payment of $240K loan & c) Profit of 20KOhhh I get it nowww !!! So if I sold the property for $320,000 and my loan was $240,000 I wouldn't have to worry about the 25 year interest because basically the purchaser has paid off a whole lump sum of $320,000 so basically he paid off the whole loan for me???
So I wont have to worry about the interest behind the loan because its been paid off. I think I was getting confused with the life of the loan. But realistically if your property is going up your going to be fine to sell which repays back your loan?? If property falls than Im screwed
You got it mate
Than people that pay off a whole property of say $300,000 than after 25 years its worth 350,000 basically you wouldn't of made much in return???? So its better to hold and sell at perfect times???
Ive been reading steve mcknights book you basically can positive gear if you throw a bigger deposit or even stretch out your loan repayments by 30years
If it was investment property and you rented that out and positive geared at a 30 year loan so cheaper re-payments and relied on capital growth would you still make money??
I have been reading a lot on these forums and everyone talks about interest only loan structures, I have read a few of austrailan property books and all go against the interest only loans, am I missing something here??
Hi Mate
The Newbie Investor wrote:Than people that pay off a whole property of say $300,000 than after 25 years its worth 350,000 basically you wouldn't of made much in return???? So its better to hold and sell at perfect times???Have you ever tried to pick the bottom and top of the share market ?
Property is similar in a lot of ways, albeit slower moving… it is generally near impossible to get it right 100% of the time. So although you can try this strategy, there are other options available.
For example, each time you buy / sell a property you have to pay Capital Gains Tax (if an investment property), Stamp Duty and Legal Fees…. so instead of selling the property once it has gone up in value, you can withdraw some of the equity via a second loan and use that as a deposit for property number 2. (then a few years later, withdraw some more equity for property number 3 etc). If you want to 'create equity' as opposed to waiting for it, then a basic reno (kitchen / bathroom etc) can work wonders….
In regards to interest only loans / offset accounts, have a read of this thread – it has both the pro's and con's of this type of set-up (scroll down to the last 4 or 5 comments)
https://www.propertyinvesting.com/forums/help-needed/4349510
The Newbie Investor wrote:I have been reading a lot on these forums and everyone talks about interest only loan structures, I have read a few of austrailan property books and all go against the interest only loans, am I missing something here??
I would be suprised if this is the case. Can you point out any books in which this is recommended?
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 TNI,
I wonder if your early confusion might have come from "past experience?" I am referring to a Flat Rate Loan.
These are called different names, are usually for small amounts (e.g. Personal Loans) and the Interest paid each month is on the FULL amount until the whole lot has been repaid. So, even if you paid some of the principal down each month, the Interest charged is as if you had not reduced the principal at all.
They sound like a "cheaper rate of Interest", but if you do the sums, the catch of having to pay Interest on the FULL amount until every dollar has been paid back has them being quite a nasty piece of work. If you have had one of these from a Finance Company, you might have thought "All loans work this way" – hence the confusion.
As others have already explained, and you are getting to understand, the usual loan is nowhere near as nasty as those ones.
Benny
I would be suprised if this is the case. Can you point out any books in which this is recommended?[/quote]
Hey Terry I was just reading the great Australian dream and mortgage free debt free and they both don't recommend paying interest only loans.
But hey I am learning so this is great if I can get my head around this
mortgage free debt free – by the title of that they would want you to pay PI!
IO loans are good as it will save you tax until you can pay off non deductible debt. If you are paying down an investment property then this is money which could have gone to paying off your home loan which is non deductible.
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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