Use all available equity or take new loan

Hi Sark,

I was wondering which is a better option. I have two IPS which have equity around 200K. I can service only one more loan of 600K. Should i use all of my equity and borrow the remaining 400K from new loan or should I just get the 10% equity and borrow remaining 540K from new loan.

In the long run which would be a better option

Since you are talking about “using all of your equity” vs “using just 10% equity”, it strikes me that you are to be borrowing the same total amount anyway.

Am I right? If so, then (like Terryw) I see no sense in you paying LMI unnecessarily.

If I am not right, then please add some more words around your meaning of “using all of your equity” – e.g. do you already have an Equity loan in place that we don’t know about (???) so, to you, it seems like you are using “cash” rather than borrowing more.

Benny

Hi Sark,

Thanks for the clarification. From these extra words then, a few more questions spring :-

1. You seem to understand that the Equity in IP1 and 2 must be “available” – although you don’t include figures to demonstrate this, your comments re “LVR for both IP1 and IP2 will be 80%” gives me the impression you have this covered. So, “check!”

2. I can’t think of anything substantially different in doing it one way over the other – but I am not a Mortgage Broker – could there be some extra “value adds” that one of those venerable people might be able to add here (consider next point, and options it might provide…)

3. You don’t mention lenders – could it be that you might look at mortgaging the new IP with a totally different lender? If so, that might lead to benefits that you perhaps haven’t even considered (e.g. not all eggs in one basket, better rates or lending rules, easier future loans from a different lender, etc). And there you are getting right into the sweet spot of the Terryw’s of this world !! MB’s know this stuff backwards,

Benny

Draw out all available to 80% LVR and then store the funds so nil interest charge until used.

Then for the subsequent purchase purchase at whatever the most appropriate LVR (80%, 88%+LMI) etc and then you’re set.

It’s best to draw out the equity while you can, as serviceability decreases with each purchase you may otherwise find yourself with equity you cannot draw out and then you’re stuck.

Likewise lender regulatory risk is a real thing with the significant policy changes ever coming through. We’ve seen a number of lenders reduce their IO terms available and LVR’s which interest only can be taken – so it would be best to get this sorted ASAP whilst you can.

Normally people would access enough money from equity release to fund a 20% deposit, stamp duty and buying costs on a new investment property purchase. The balance (80% of purchase price) would come from a new and separate loan.