Hey all
After hanging around this forum and reading posts for the past years or so my wife and I are finally in a position where we are purchasing an investment property. I am sure that we a going about this correctly but now that I have to actually step up and do it my nerves are kicking in and so I am hoping that I can run what we are doing by you all to make sure we are doing this right
We spoke to a broker on the weekend about using the equity in our home as a deposit for our investment property.
We currently have an offset loan on our house and we have approximately $160K equity in our house, of which we want to use $60k as a deposit on a new investment property. So this new house will be fully financed by loans.
Our broker applied for a loan from our current bank for $100K. He assured us that it is a separate loan from the one on our house. Even though it is using the equity on our house to get it.
We will then use this loan as a deposit and get a third loan to purchase the investment property.
Are we setting this up correctly and avoiding cross-collateralizing our loans?
Sounds ok.
How much is the new purchase worth?
Will that $100k cover off a 20% deposit plus costs (stamp duty, legals, etc)?
Will you be using the same lender or a different one for the IP?
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]
Hey Jamie.
Great thank you.
We are hoping to use no more than $60K for the deposit on a house that is 300K or less. We were looking at using our own money to pay for the extras (stamp duty, etc) however if we can use less than the 60K for a deposit by getting a cheaper house then we will probably use the loan to pay for as much of the extras as we can.
We aren’t necessarily planning to use our current lender. We will probably go with anyone who will give us the money. :)
Best not to use your own cash for costs.
Borrow extra for those – and you’ll maximise your deductions.
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]
ok. Will do. Thanks for that.
I am a bit worried that I am actually paying the whole price of the house with loans. So the thought of going over by using the loan for that as well was daunting.
The plan of course is to get a discounted price though o hopefully we can get it discounted enough to cover all those costs.
There’s no material difference in paying for the entire purchase with a loan in terms of risk. What it does mean however is that you’re putting cash funds towards an investment purchase, which you could otherwise be putting towards your own home loan. The net result is the same debt levels between the personal and investment debt, but less of it is personal debt meaning more tax deductions for the same net costs.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
I am a bit worried that I am actually paying the whole price of the house with loans. So the thought of going over by using the loan for that as well was daunting.
You’ll be paying the whole amount regardless – generally best to do it with borrowed funds and maximise your deductions.
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]
Purchasing at a so called discounted price will not reduce the amount you have to put down as deposit as a lender will only lend against purchase price / valuation whichever is the lower.
Very unlikely you will see the valuation come in at more than the purchase price and even if it did your borrowings would be unaffected.
Cheers
Yours in Finance
0-40 Properties in a decade. Ask me how.Richard Taylor | Australia's leading private lender
Exactly Richard. Lenders have a policy of accepting the lower of either the purchase price or valuation – so even if you think you’ve got a steal, this won’t lead to any reduced deposit at the point of purchase.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
huh. That makes sense. Also makes me feel a bit more comfortable.
Thanks alot guys.
Hi Rillanon,
The plan of course is to get a discounted price though o hopefully we can get it discounted enough to cover all those costs.
You may be able to do that, but it will remain locked in “future Equity” until your next valuation – at which time, you might be wanting to take some as a Deposit on another IP… ;)
They say “You make your Profit when you buy” – but you don’t always get to see it at time of purchase (for the reason stated above – “the Bank will only lend to the lower amount of Contract Price or Valuation”). If you have bought well, you have salted away any discounted amount as stored Equity. e.g. Buy a house for $350k where other similar properties sell for $400k and you have an extra $50k in Equity from day one.
On your next valuation, that Equity is (partially) available as Deposit and Costs for another IP. Why partially? Simply because you might be able to borrow at 90% of valuation – thus, your new valuation of $400k allows borrowing to $360k. Your earlier mortgage (90% of $350k) is $315k. So, new mortgage of $360k minus old mortgage of $315k = $45k (not $50k).
And, after that new valuation, you still have $40k Equity – but you CAN’T borrow against it at 90%. You would have to find a lender that would go to 95% to get at that extra Equity. Despite all of that, the Equity you created on Purchase is YOURS to utilise – but not from Day one !! ;)
Benny
Thanks guys.
That info is very helpful.
I can stop worrying about using borrowed money for the house and the fees. I have been sourcing a good accountant to help make sure that I am structured properly and ensure that what comes in can cover what goes out.
Our bank has started playing hardball with our application so there is a chance it wont go through after all but at least I have learnt something if it doesn’t pan out.
Our bank has started playing hardball with our application so there is a chance it wont go through after all but at least I have learnt something if it doesn’t pan out.
I’m biased – but I’d give the DIY a miss (going direct to the bank) and get a decent investment focused broker on board. Shouldn’t cost you anything – and should ensure there’s no hiccups.
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 Rillanon,
The plan of course is to get a discounted price though o hopefully we can get it discounted enough to cover all those costs.
They say “You make your Profit when you buy” – but you don’t always get to see it at time of purchase (for the reason stated above – “the Bank will only lend to the lower amount of Contract Price or Valuation”). …. Despite all of that, the Equity you created on Purchase is YOURS to utilise – but not from Day one !! ;)
BennyYes, Benny is correct. I have had a couple of client purchases come in with pre purchase valuations higher than the contract price (not often) but bank won’t lend on the higher number. The patient can win as described by Benny but you need to find deposit and cost money from somewhere for the short term.
BuyersAgent | Precium
http://www.precium.com.au
Email Me | Phone MeSouth Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au
Our bank has started playing hardball with our application so there is a chance it wont go through after all but at least I have learnt something if it doesn’t pan out.
I’m biased – but I’d give the DIY a miss (going direct to the bank) and get a decent investment focused broker on board. Shouldn’t cost you anything – and should ensure there’s no hiccups.
Cheers
JamieI agree. Good broker wins when thing get messy every time. Those replying to you on this forum and this thread are some well above average ones from direct experience.
BuyersAgent | Precium
http://www.precium.com.au
Email Me | Phone MeSouth Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au
I currently am using a broker. He didn’t tell us that we had to use our current lender for the equity loan but I guess it kinda became an assumed thing.
Is this not the case? Am I able to take the current equity I have and taking it to another bank.
If not, then I might have to find another broker.
Also, would there be any advantage (other than a better interest rate, less fees, etc) to having the first loan for the investment property with another bank?
I just wanna say as well. Thank you very much for all your help everyone
He didn’t tell us that we had to use our current lender for the equity loan but I guess it kinda became an assumed thing.
It seems you have an existing mortgage on your home, right? If so, then you won’t be getting an extra equity loan from another lender (that is getting into 2nd Mortgages and such complexities). But I personally kept my IP loans with another Bank – just to put an extra level of protection between my investments and my own home.
A good Mortgage Broker can give you chapter and verse on all of that stuff. It is always sensible to get a plan in place when starting investing (BEFORE starting investing). And knowing your finances (or having a trusted team member who looks after all that) is mandatory for the best results.
I’d say pick a Mortgage Broker, ask a heap of questions, and just see how well they guide you. If they don’t, cut them loose and try again. The best ones are teachers too – and you learn heaps from them (all to the good!!)
Good luck,
BennyHey Benny
t seems you have an existing mortgage on your home, right?
Yep that is correct. So we should actively try to get our third loan for the house from a separate bank. Even if it costs us a little bit more?
After taking part in this post my wife and I have decided to find someone who can guide us with this purchase. This first purchase is key to getting us up and running and so we wanna get it right. We have a couple of companies in mind from this forum
Hi Rillanon,
So we should actively try to get our third loan for the house from a separate bank.
By that, I think you mean “The loan that has the new IP as security” (not the loans that exist against your own home). As I think things would go:-
1. You would have an existing Mortgage against your PPOR (own home)
2. You are looking to borrow an extra amount to provide “Deposit and Costs” for an IP – this is a second, separate loan against your own home.
3. The “third loan” is the one secured by the new IP (probably around 80% of the value of the IP. And yes, THIS one could be held by another lender without too much drama. But talk it out with your adviser re all aspects of whether this should be a separate lender, or your old one.Just because I chose to keep my Home lender and my IP lenders separate, this was almost 20 years ago – some things might have changed, so check what is right today with your adviser.
We have a couple of companies in mind from this forum
Some good people on here – you should go well,
Benny
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