Hi guys,
I am a little bit confused about collateral mortgage. I tried google it – it did not help. I would highly appreciate if someone shed my light how does it work.
So, we will have around $130,000 savings by the end of this year. We are saving up so we could buy a house in Brisbane. We have 2 options here:
Option 1 – save up, put it as a deposit – so we do not have to pay mortgage insurance;
Option 2 – buy an investment house in Tasmania, which will be mortgage free, and put it as a collateral for our new house mortgage in Brisbane. We will keep the investment property to our daughter (1 year old). I hope by the time she will be 18, the house will add value. It looks like better option as we end up having one more property ( which most likely increase in value over time) rather than we deposit to the bank in cash and it will be stuck there. In fact, in both cases it will ease loan insurance. Would be good if someone share their knowledge about the drawbacks& benefits of collateral mortgage. What option do you recommend? Thanks
Hi Dibektemir,
And a big welcome to you. We hope you get information from here to assist your investment path. It is good that you have asked questions, as I am sure the good members on here can direct you in a beneficial way.
It sounds to me like you are putting yourself in a good financial position – by using a finance adviser who is skilled in this area, this will be a huge help to you in the future. Right now though, since I am not skilled, may I say that several folk on here ARE, and they usually pop in to help members like yourself, so please await their replies.
In the meantime, why not take a browse through the forum area – in there, you might find this link – it contains a lot of good early knowledge that might help you:-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/Enjoy !!
BennyHi Dibektemir
If you want to shoot me an email i can send you a PDF article i wrote for the API magazine on the reasons why you should not cross collateralise your property.
Ways of achieving the same result without having to cross collateralise.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi guys,
I am a little bit confused about collateral mortgage. I tried google it – it did not help. I would highly appreciate if someone shed my light how does it work.
So, we will have around $130,000 savings by the end of this year. We are saving up so we could buy a house in Brisbane. We have 2 options here:
Option 1 – save up, put it as a deposit – so we do not have to pay mortgage insurance;
Option 2 – buy an investment house in Tasmania, which will be mortgage free, and put it as a collateral for our new house mortgage in Brisbane. We will keep the investment property to our daughter (1 year old). I hope by the time she will be 18, the house will add value. It looks like better option as we end up having one more property ( which most likely increase in value over time) rather than we deposit to the bank in cash and it will be stuck there. In fact, in both cases it will ease loan insurance. Would be good if someone share their knowledge about the drawbacks& benefits of collateral mortgage. What option do you recommend? ThanksWelcome, welcome!
Alright, so here’s what I’m thinking:
1. Each property needs to have value in its own merit. If, for example, the vacancy rates are high in TAS and you won’t be able to rent it out, you’ll be out of pocket on the mortgage of it.
2. Now, I know yo mentioned buying without a mortgage but the best way forward in such a case, IMHO, is to take an 80% mortgage on the IP (in TAS) and ensure you have a redraw facility (offset would actually be better) and park your funds there until you find your PPOR. Once you find it, you can take the funds from the IP to be used a deposit for your PPOR. This way the properties are not crossed.
3. Any available funds after the above should probably first go to offset the PPOR (as its non deductible debt) and once that’s done, offset the IP Mortgage.
4. Sounds like you’re after “buy and hope” in TAS. Is that also the case for your PPOR? I personally like to manufacture growth and enjoy the market instead of fully relying on it.
Hope this helps? 👍😎
Cheers,
EthanEthan Timor | Aligned Finance Pty Ltd
http://www.alignedfinance.com.au/
Email Me | Phone MeActive Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)
You will definitely want to avoid cross collateralisation (using one property to secure anothers debt) – as this is poor structuring and can be avoided so you don’t put yourself at unnecessary risk.
Paying cash for the investment wouldn’t be the best move, you would likely want to finance the purchase to at least 80% LVR, then retain the remaining funds for the PPOR. This way you would have a smaller PPOR mortgage and higher on the tax deductible investment loan than if you paid cash for the investment – making your overall tax/cash flow position more effective.
Even better would be to make a purchase of your PPOR first using all of your cash, then setting up a new equity release split against the PPOR after settlement to cover the deposit of the investment property, allowing you to borrow 100% for the purchase of the investment property and making the non deductible home loan as small as possible.
The aim of the game in structuring investment vs personal residential loans is whereever possible to make the non deductible residential loan smaller where you could otherwise have the investment loan larger – otherwise you’re reducing your tax effectiveness and increasing the ‘bad debt’ of your own home loan more than necessary.
Best to chat to your accountant who can explain the tax implications of what you’re trying to achieve.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
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