Hello everyone,
Just a quick question so see if we are correct in our understanding of what it means to use equity to buy investment properties.
Here is our example (I’ll use our figures):
We bought out home for $93,000. The value is $125,000, but the loan is only for $74,000 (80% of sale price, so as far as the bank is concerned the value is $93,000). Anyway, we could have about $50,000 equity in our home.
So, if we draw this equity and use it as a deposit on an investment, does that mean we have:
1. Our original loan extendend to $125,000 AND
2. A new loan for the investment (minus the deposit)?Is this how it works??
Thanks,
Karl and Rita
The future belongs to those who believe in the beauty of their dreams. – Eleanor Roosevelt
Karl and Rita
You’ve got the concept right, but…
If your property is valued at $125K, you’ll find a bank only willing to lend you 80% (or 90% with MI), or $100K.
So you’d have PPOR loan of $74K and an investment loan of $26K secured against your PPOR, PLUS you would then have the new loan secured against your IP.
You need to keep the PPOR and investment loans separate for taxation reasons.
Cheers
MelThanks Melbear, just one more thing…
Does the $26k become part of the investment loan or is it still part of the PPOR loan. What effect does it take as far as tax goes.
Thanks
Karl and Rita
The future belongs to those who believe in the beauty of their dreams. – Eleanor Roosevelt
Hi Karl and Rita,
You are on the right track but with a couple of clarifying points.
Assuming the bank recognises th evalue of your property is $125K they will allow you to lend up to 80% of this ($100K) less your existing loan ($74K). As such you have $26K of equity you can use towards the deposit and costs on other property.
Assume you find a property for $100K you find a lender who will provide an 80% loan ($80K) with the balance $26K (assuming $6K loan/purchase costs) from your line of credit.
Under this set up you will have three loans. One for $74K on your own home, another for $26 being the line of credit and the third for $80K being the investment property.
In each instance you can go beyond 80% if you were prepared to pay Loan Mortgage Insurance and if the LMI providers were prepared to accept your locality as suitable security.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Hi Mel,
Bugger – you type too fast[biggrin]
But in answer to the question – the $26K is deductible because the funds have been used for investment purposes – even though security is provided by your house it is the purpose of the loan which determines deductibility.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Sorry Derek[biggrin]. One good thing from school.
Karl and Rita, the $26K would/should be a separate loan to your PPOR loan, but secured by your PPOR.
So for tax purposes, it is an investment loan. If it’s used to buy the investment property, you’ll count it in your borrowings for it at tax time.
Cheers
MelThanks Derek, things are a little more clearer now[thumbsupanim]
K&R
The future belongs to those who believe in the beauty of their dreams. – Eleanor Roosevelt
$100k investments is what I find for people. Maybe Derek for finacial advice and me as the spotter?
DD
Don’t sweat the small stuff,and it’s all small stuff!!
Hi DD,
Thanks for the unsolicited ‘plug’ but I must highlight that I am not a financial advisor and my sole purpose on this forum is to share information.
Sure if people want to contact me – fine – but I am not interested in open solicitation beyond a signature ‘ad’.
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Karl and Rita :o)
You wrote:
“We bought out home for $93,000. The value is $125,000, but the loan is only for $74,000 (80% of sale price, so as far as the bank is concerned the value is $93,000). Anyway, we could have about $50,000 equity in our home.”
If you say that the Bank has valued your home at 93k, then, for all intents and purposes, your house is worth 93k. Unless you take your loan elsewhere, you need to consider the value the bank put on your house- not the value you *think* your place is worth. Sorry to be the bearer of bad perspectives, but in this case oyu have suggested, you have no real equity except for the 20% deposit.
A note to Derek.. Derek, you said:
“my sole purpose on this forum is to share information.”
Derek, I think you’re a lovely guy, but I do remember you said on this Forum that you wished to mentor people- and to charge people money for that mentoring. If that is still the case, then you have an additional purpose to merely “sharing information”. I think you give great advice, and as I said, you’re a lovely man, but I also think people need to be open with any (financial) agenda they have.
kay henry
Originally posted by kay henry:Karl and Rita :o)
You wrote:
“We bought out home for $93,000. The value is $125,000, but the loan is only for $74,000 (80% of sale price, so as far as the bank is concerned the value is $93,000). Anyway, we could have about $50,000 equity in our home.”
If you say that the Bank has valued your home at 93k, then, for all intents and purposes, your house is worth 93k.
This owuld be true at the time of purchase of PPOR. Naturally it will be revalued during loan application process.
Originally posted by kay henry:Derek, I think you’re a lovely guy, but I do remember you said on this Forum that you wished to mentor people- and to charge people money for that mentoring. If that is still the case, then you have an additional purpose to merely “sharing information”. I think you give great advice, and as I said, you’re a lovely man, but I also think people need to be open with any (financial) agenda they have.
kay henry
Hi Kay,
Yep that comment was made in response to a question about ‘business ideas etc’ someone asked some time ago and was highly relevant to the discussion thread. Others shared their thoughts and I shared mine but…….
I emphasise the comments in that thread were strictly a series of my ideas at the time and there is a long way to go before that idea even reaches fruition. But rest assured my ‘pig headedness’ will get it up and running one day.
Bloody work keeps getting in the road [biggrin]
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Derek :o))
kay henry
Sorry to jump into this one folks but I’m now a little concerned that perhaps I’ve misunderstood our situation. (thank god we haven’t moved forward yet)
we have an existing line of credit of around $25000, of which we have used around $12000. As our PPOR was last valued at around $150000 i take it that we have un-tapped equity of $95000 (150000×80%- 25000) plus $13000 available on line of credit. Let me know if i’ve got it wrong!!
By applying some of the existing line of credit to deposits on IP’s we can claim that portion of interest bill on line of credit on tax. Right???
If we were to extend our line of credit to say max ($120000) would that be a better option than seeking a “new” finance package?
Much appreciate feedback
Ray
To begin and not succeed is not to fail
To never try is to failHi Ray,
“we have an existing line of credit of around $25000, of which we have used around $12000. As our PPOR was last valued at around $150000 i take it that we have un-tapped equity of $95000 (150000×80%- 25000) plus $13000 available on line of credit. Let me know if i’ve got it wrong!!
Yep 80% of $150K less anything you have spent gves you a potential LOC of $108K after allowing for the $12K already spent.
The final figure will be dependent upon your aims, income levels, and valuation by the bank
By applying some of the existing line of credit to deposits on IP’s we can claim that portion of interest bill on line of credit on tax. Right???
Yes – the purpose for which the money is used will determine its deductibility.
As a word of caution keep your non-deductible and deductible debt in split accounts. This way you keep things nice and tidy for your accountant and the ATO – if they ever came knocking it will be very easy to justify your claims.
If we were to extend our line of credit to say max ($120000) would that be a better option than seeking a “new” finance package?
If I were in your shoes I would extend the line of credit out to 80% and use these funds as deposits and purchains costs for property – with the remaining funds coming from the bank.
I would suggest you meet with a broker to discuss your best configuration as you will need to balance the need to extend your LOC with its impact on your borrowing capacity/
Derek
[email protected]Property Investment Support Available. Ongoing and never stopping. PM welcome.
Thanks Derek
All much clearer and more comfortable. Trick now is to find relevant IP’s. Would you suggest having full extent of LOC available before searching or extend LOC once we’ve begun the journey?
Ray
To begin and not succeed is not to fail
To never try is to failRay,
I would suggest pulling out maximum equity now,Looking at it from a lenders perspective, If property values were to fall in the future, you may find your curent level of equity has also reduced,
Regards
Steven
Mortgage Broker[email protected]
http://www.mobilemortgagemarket.com.au
Ph:1800 820 500
VictoriaPLEASE note comments made should NOT be taken as specific taxation, financial, legal or investment advice. Please seek professional, specific advice.
Thanks Steven
Ray
To begin and not succeed is not to fail
To never try is to failYes, again I find myself in agreement with Derek about get your max equity now. I have so many people that ask me to find IP’s and when I do They say ok ill get finance now and 50% dont or cant for whatever reason.
Now I ask people to at least have pre approval which means the val on existing equity is done and all is set except for the right IP. Saves all the drama of the qld quick settlements falling apart and you loosing a deal I or others help you with.
Go get the $$ first. Plenty will help you spend it I’m sure of that.
DD
Don’t sweat the small stuff,and it’s all small stuff!!
Kay Henry,
Yes the present value is $93K, but we have an independant valuation stating a value of $125K. I believe we would have to refinance to access this equity, yes?
K&R
The future belongs to those who believe in the beauty of their dreams. – Eleanor Roosevelt
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