All Topics / The Treasure Chest / 10% or 20% deposit?

Viewing 15 posts - 1 through 15 (of 15 total)
  • Profile photo of SooshieSooshie
    Member
    @sooshie
    Join Date: 2002
    Post Count: 974

    Hi all,

    Scenario 1
    Purchase price 75K
    Deposit 7.5K(10%)
    P&I 6%
    Plus Mortage Insurance (not sure how much)

    OR

    Scenario 2

    Purchase price 75K
    Deposit 15K (20%)
    P&I 6.75%
    No Mortage Insurance

    Both loans over either 25 or 30 year loan. If you think you will be cashed out early, what would you do? Put in 20% deposit and not pay for mortage insurance, but incur higher interest rate or put in 10% deposit pay mortage insurance but at a cheaper interest rate?

    Either way, you are still funding investment with debt, so which would you chose[?]
    If I’ve confused anyone, it’s probably myself [:0)]. I did mention, the finance part of wraps is not my forte [:P] If possible could you please explain why you would choose one over the other?

    Cheers

    Sooshie [:D]

    Which would you do?

    There are no problems, only solutions

    Profile photo of insiderinsider
    Member
    @insider
    Join Date: 2002
    Post Count: 64

    To me the answer is simple soosh. Definetly borrow on 90% whether it be P&I or IO depend entirely on your strategy. If I could borrow 100% from the bank I would (I believe Henry Kaye has mastered this, although I don’t know whether his approach is entirely honest). The least money you have in the deal the better. Work out the ROI on 80% LVR and 90% LVR. Big, big, big difference.

    The banks also tend to cut you off if you keep borrowing at high LVR’s, so that to is something that needs to be considered.

    Profile photo of SooshieSooshie
    Member
    @sooshie
    Join Date: 2002
    Post Count: 974

    HI Insider,

    That was my thinking aswell. I should clarify that the deposit is funded from an account bearing an interest rate of 6.75%. Therefore I thought that if we pay mortage insurance, we would be allowed to only put in a 10% deposit and fund the 90% on a 6% interest rate (the new mortage).
    I’ve been told by numerous accountants that they would do it with a 20% deposit. In my way of thinking, you don’t break even till a few years down the track, whereas with only a 10% deposit on 75K, the first home owners grant basically almost covers the cost of outlay.
    I might be getting myself more confused though. Perhaps it all breaks even in the end.

    Cheers

    Confused Sooshie [;)]

    There are no problems, only solutions

    Profile photo of Stuart WemyssStuart Wemyss
    Member
    @stuart-wemyss
    Join Date: 2003
    Post Count: 598

    Hi All

    Here’s a trick. I advised a client and friend of mine to do this recently and it worked with no problems.

    Borrow 80% and take out a personal loan for the remaining 10% (or what ever). The bank doesn’t mind (so long as you meet serviceability). You can then pay off the personal loan or refinance it into the mortgage after the property has increased in value. Either way you are better off than paying mortgage insurance (i.e. the cost of mortgage insuarnce is greater than the additional 4% (where personal loans are approx. 10% less mortgage rates at 6% = 4%) in interest costs).

    Anyway, do the numbers to prove it to yourself. It might be worth considering.

    Good luck.

    Stu

    Property & Finance News
    at http://www.prosolution.com.au

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Sooshie

    Why are the interest rates different?

    Terryw
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of SooshieSooshie
    Member
    @sooshie
    Join Date: 2002
    Post Count: 974

    Hi Terry,

    We fund the deposit from our equity on our house which is at one interest rate and then we take out a new mortage on the new property on the best rate we can get.

    Now please remember that the finance side is my husband’s role, not mine, I hope I haven’t confused anything. [:I]

    Cheers
    Soosh [:)]

    There are no problems, only solutions

    Profile photo of insiderinsider
    Member
    @insider
    Join Date: 2002
    Post Count: 64

    As far as I’m concerned soosh using a LOC is just like using cash. If you have a 200K LOC, how many houses can you buy using a 90% LVR compared to an 80% LVR (providing the house are positively geared). To me the answer as quite simple.

    As far as using PL’s to fund the 20%. hmmm The figures I have worked out conclude that it is actually better off paying mortgage insurance then paying the higher interest rate.

    Example.
    Loan Term 25 years
    House 200K
    80% LVR = 160K @ 6.09%= $1039.70
    40K deposit @ 10% IO = $ 333.33
    TOTAL = $1373.03

    4% extra interst paid on PL over 3 years = 1600×3
    =$4800
    You paying $4800 in extra interest while also killing your cash-flow.
    O.K. your argument could be to refinance If (and I don’t like ifs) the property goes up in value.
    I’ still rather just pay the mortgage insurance.
    You can get this capatalised into the loan anyway @ 6.09%.

    Example Paying Mortgage Insurance

    Loan Term 25 Years
    House 200K
    90% LVR = 180K + 2K MI Capitilised @ 6.09%= $1182
    Deposit LOC 20K @ 6.09% IO = $ 101
    TOTAL = $1283

    An extra $90 in the pocket each month.

    Profile photo of insiderinsider
    Member
    @insider
    Join Date: 2002
    Post Count: 64

    I just re-read my post and I must apologise for the spelling mistakes.

    Profile photo of SooshieSooshie
    Member
    @sooshie
    Join Date: 2002
    Post Count: 974

    Hi all,

    Insider, I think I win hands down with the number of spelling mistakes [;)].
    I think my husband has decided on 20% LVR, as cash flow is better p/w this way. Our accountant suggests this way, so who am I to argue [;)] I honestly would rather leave the figures to hubby. Personally for risk minimization I prefer to do it at 10% LVR.

    Horses for courses.

    Cheers
    Sooshie [:)]

    There are no problems, only solutions

    Profile photo of insiderinsider
    Member
    @insider
    Join Date: 2002
    Post Count: 64

    Sorry soosh I don’t see how the cash-flow can be better when you borrow at 80% LVR. At the end of the day you are still paying interest on your LOC which almost mirrors your mortgage. The only way to improve cash-flow would be to use cash for your deposit. Of course then your ROI suffers.
    Believe me 90% is the way to go. I personally wouldn’t listen to what your accountant has to say on this matter.

    Profile photo of DavidUDavidU
    Member
    @davidu
    Join Date: 2001
    Post Count: 101

    I guess the question is ‘How many can you buy at 90%?’

    David U

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    It might be an idea to get the 90% LVRs while you still can. As you become bigger with more properties, it will be harder to get higher LVR loans.

    Another thing to think about maybe??

    Terryw
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of SooshieSooshie
    Member
    @sooshie
    Join Date: 2002
    Post Count: 974

    HI all,

    Well yesterday we discussed the issue of LVR and as Michael (my hubby) explained, it was trying to convert personal debt into investment debt. There are tax implications, which (taxation) is an area which is something I wouldn’t touch with a ten foot pole. It really is not my area of expertise. Most of you know I come from a medical background (nice and juicy stuff) far removed from this area. I have always gotten my hubby to do my taxation (or the accountant). I guess this just highlights the importance of trying to find someone who will balance the strengths you bring to the table (as in my case, the personal/social skills and the love of real estate) and weaknesses (calculations, taxation and financial stuff, all the dry stuff [}:)]!)
    Anyway, thats just by the by.
    At 80% LVR, the banks don’t see you as a liability, but if you have to get mortage insurance (90%) they are more likely to limit your potential to borrow and you get maxxed out sooner.
    Stuart, I’m not sure I followed your suggestion.

    By the way, if I seem ‘Thick’ in this area of finanaces, it’s because I am [:0)]. Similarily, If I asked you what placenta previa or hyperemisis gravidarum is, you’d say “What?”.
    Horses for corses…. please bear with my ignorance on financial matters. I do understand the basic concepts, but when getting into the nitty gritty, unless it’s detailed down on paper, I find it hard to follow.

    Cheers
    Sooshie [:)]

    There are no problems, only solutions

    Profile photo of FWFW
    Member
    @fw
    Join Date: 2002
    Post Count: 478

    So were you involved in obstetrics and gynaecology Sooshie?

    Keep smiling
    Felicity 8-)

    Profile photo of SooshieSooshie
    Member
    @sooshie
    Join Date: 2002
    Post Count: 974

    Hi Felicity,

    I’m a Midwife. I have other qualifications including Acupuncturist, Phlebotomist (fancy term for ‘blood sucker’ [:0)]) and Registered Nurse.
    I don’t know of too many nurses that are good with finances, but that’s not to say there ar’nt any!
    As hubby told me, over dinner, I spelt ‘corses’ wrong. So I correct it now…
    Horses for Courses. [8D]

    I believe you are going to meet hubby on the forum shortly… He’s going to shed some light on the scenario’s I’ve proposed and perhaps explain his decision. I’d love to read the responses after that. I’m sure you’ll all be agreeing that it’s a good idea I leave finances to hubby [:D]

    Cheers
    Sooshie [:0)][:0)][:0)]

    There are no problems, only solutions

Viewing 15 posts - 1 through 15 (of 15 total)

The topic ‘10% or 20% deposit?’ is closed to new replies.