I attended Steve’s last Masters event last May in Melbourne. I learnt heaps and now want to put the strategies into place. I hope you experienced investors can assist.
First Question. After we set up a line of credit in our Home Loan we can use this as deposits on investment properties. Do we use our Home as loan security, as the Bank is suggesting, or the Investment Property?
We see problems either way:-
1. Using the Investment Property we need to come up with the 10% – 20% deposit each time and that would quickly evaporate the LOC.
2. Using the Family Home there are security concerns and if we sold it resecuring the Investnment properties would be a nightmare – would the costs be forwarded onto us or would the Bank absorb them??
HaroldMember@haroldJoin Date: 2003Post Count: 80
If you positive gear, you should have infinite borrowing power in theory. Secondly, make sure you get assets for less than they are worth. Infinite borrowing power again, in theory. Put everything up for security, the banks will seize unsecured property anyway if something goes wrong. Maintain a bufferStuart WemyssMember@stuart-wemyssJoin Date: 2003Post Count: 598
Yes – if you positive gear you can have unlimited borrowing capacity… if your yield is over 11%!
Yes – purchasing under fair market value = unlimited borrowing capacity. Very hard to lend against value. Bank normally take contract price. You would also need to consistently purchase at least 25% fair market value… good luck.
DO NOT put everything up for security.
Yes, you do need to secure the line of credit with your home. You then pay 20% plus costs from this and take out a separate loan for 80% secured only by the investment property. If you sell it then make sure the loan has portability (i.e. you can substitute the security). Or you just refinance the loan when you move.
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Thanks Harold & Stuart,
So we should use the Investment Property as security NOT our home. OK
Do we fund the 20% investment property deposits with our money? Even with + cash flow it will take some time to accumulate sufficient funds.
Or, constantly using LOC would soon evaporate that facility.
The Banks point was that if we use our home as security the ongoing investment loans would be easier to get (no need for individual assessment of each investment loan). Also we could use the LOC as the deposit then borrow 100% of investment property price which would then bring our LOC back to $0. Therefore we could constantly fund deposits.
Stuart, why do mention only borrowing 80% – is this because Lenders Insurance is not needed?
[8D]dr houseParticipant@dr-houseJoin Date: 2001Post Count: 281
My home line of credit with CBA is the best thing since sliced bread!
I have used it again and again and increased my home valuation to borrow more.
Yes, of course the bank holds the title and the title of all other properties that you buy.
A 20% deposit is usually required to buy an invest. property and I find is a good buffer.
The line of credit is extremely flexible, put all income in, incl rentals and have all loan payments taken out of it.
Don’t cross-collaterise the properties and should not be necessary with 20% dep.
I don’t fully draw on the line of credit, wanting to leave a buffer and within my comfort zone.
We plan to sell off one of our dual occ. properties as soon as council approval comes through, maybe renovate the house, depends on possible return.
This will free up most of the line of credit and off we go again!
Make sure you use the line of credit for invest and not expensive holidays/cars etc.
In fact that is one of the requests by the bank, that it be used for investment.
If the line of credit is fullt used for invest, interest rates can be apportioned to the various properties.wilandelMember@wilandelJoin Date: 2003Post Count: 761
Yes, 20% deposit plus costs from LOC.
80% stand alone separate loan – ALWAYS!!!!!
Don’t be concerned about the LOC running dry, as long as you leave a little there for an unexpected emergency. After all, that’s why you took it out. It is there to fund deposits.
If you use variable loans for your IP’s, they are easy to refinance once you have built up some equity in them. From there, you can fund more IP’s.
Do not let the bank use your PPOR as security against the IP. Do not put your PPOR at risk any more than you have to.
You have been given good advice from Stuart and Regina.
PS.. Try a broker – much better than a bank!
Del & Will
Thanks Regina, Del and Wil,
It’s great that you guys give so much time and expertise to those who are starting out on the Investing journey. I. as I’m sure others do, appreciate it greatly.
I’ve taken that on board regarding ONLY using IP as security.
Regina, you mentioned cross-collaterisation. What is it?
We are also with the CBA. I also have a business account there. Can I also subdivide the LOC into different sub-accounts for say PI, personal (wages, etc) and Business?
I know the bank will probably set the maximum, but what LOC amount should we apply for?
Also, I didn’t quite follow it at the Masters event, but I seem to remember that Steve had a financial structure where he would go personal guarantor (as Director of his Trust ??) for the loan so that they could continually fund their purchases. I think they then replicate the structure.
Could someone explain this structure please, because I thought that the Banks apply a limit to the amount you can borrow which is a percentage (is it 30% ???) of your total income? Obviously having +ve CF properties helps but is it enough to continually fund purchases?
ArchiZENdr houseParticipant@dr-houseJoin Date: 2001Post Count: 281
The bank will value your home and usually you can loan up to 80% of the value of your home and set it up as a line of credit.
Cross-collaterise means, the bank holds multiple securities over say one property, this makes it difficult if you want to sell or refinance, it complicates everything, so its one property, one title and one security per property.
I run all my trusts, my investment company and personal items out of the line of credit, its that flexible!
It saves having multiple accounts and constantly switching money.
The only accounts I hold separately is my husbands business account and our super a/c, I have a separate credit card for the properties, to track it more easily.
you really need to set yourself up with good software such as quick books, to keep good track of the accounting (ie money trail). You can put everything in a separate class, so it will come up as a separate item on the book-keeping.
Great advice, thanks.
We were hoping to put all our wages and rentals into the LOC to obviously pay down our Home Loan (the CBA has advised that Veridian LOC accnt has to be a variable interest rate).
I notice that the CBA offers up to 10 accounts within the Veridan LOC. Has anyone set up separate sub-accounts within the LOC for say, each PIs and personal (wages, etc), with separate Credit Cards and Cheque Books, for money trail with Quickbooks for Tax purposes.
ArchiZENStuart WemyssMember@stuart-wemyssJoin Date: 2003Post Count: 598
A couple of comments for you to consider:
1. Consider not using a line of credit. Offset or basic loans generally let you do that same things at a lower cost. Many people think they need a line of credit but they don’t.
2. Consider using another lender. CBA does not discount its line of credit as much as other banks. E.g. ANZ’s line of credit is 5.97% if over $250,000 (but is based on each separate account). Speak to your broker about this.
Hope that helps.
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at http://www.prosolution.com.aurolfuschMember@rolfuschJoin Date: 2002Post Count: 7
a good mortgage broker should be able to point out to you the pitfalls of lending (such as cross-collateralisation, offset vs line of credit, trusts, mortgage insurance, etc).
Don’t give up, the answer is always easier then one thinks.
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Thanks Stuart & Rolf,
How does an Offset Account work? Do you use the redraw facility? If so I’m in a position where I need to kick start my investing by borowing the deposit (from LOC?).
I’ve also noticed low-doc loans mentioned in other posts. What are the advantages of these?
Finally, when I negotiate for the loan (incl LOC?) what things will the Banks negotiate – interest rates, application fees, others??
ArchiZENTasman PropertyMember@tasman-propertyJoin Date: 2003Post Count: 126
An offset account achieves the same as a LOC but it is actually 2 linked accounts.
A LOC is an ‘all in one’ solution where you can draw on and repay the loan however you like – as long as the interest is paid! So if you make a deposit or a withdrawal, your account balance changes and the interest charge will also reflect this. It is a very flexible option.
An offset account is a separate account linked to your investment loan account. The bank ‘offsets’ the balance in your offset account against the loan, so you only pay interest on the loan amount less the offset. It becomes slightly more confusing than a LOC as there is physically 2 accounts, but as Stuart says they can be a cheaper option (if you have a basic standard loan linked to the offset account). LOC loans are generally bundled with all the bells and whistles so you pay a higher rate in the first place.
You may even use a loan without a redraw facility, as you can draw from the offset account instead. You can use the offset account to manage your loan payments/balance – just like a LOC.
Lo doc loans are loans where you dont need to physically prove (document) your income to get the loan (by actually providing payslips etc). You still have to sign off that the income you say you have is correct. They are useful for self employed people, or those who have other issues getting finance. The interest rate is generally higher for these types of loans, and the LVR may be restricted in some cases. I wouldnt think you need to consider a lo doc loan unless you have any problems with getting finance. Even then, I would suggest you talk to a mortgage broker first and see if they can help. In fact from your post it sounds like you plan to approach the banks yourself to negotiate – just talk to a mortgage broker first. They will get you the best offer they can regardless, with no negotiation. Have you ever tried to negotiate with a bank? they just say ‘the computer wont let us do that’ (unless you have a contact higher up in the bank that can help you out)
If you go for a LOC or similar, you can probably get the application fee waived and a reduction in interest rate if you pay for a professional package with the bank (maybe $300 p.a.) – a broker can also explain this to you.
Tas scottMember@scottJoin Date: 2003Post Count: 110
Tas is 100% right about going through a broker, a very close friend of mine was fairly high up in lending at CBA. His advice to me was go to a broker because they could do much more for me than anyone within the bank. He explained that this was due to banks as a whole trying to streamline thier lending sections by outsourcing to brokers.
He now, no longer works there (his whole setion was made redundant)!!!!
“Aim for the stars and you’ll shoot the top of the telegraph pole. Aim for the top of the telegraph pole and you’ll shoot yourself in the foot!”
Thanks Tas Investor and Scott,
If they are cheaper it seems as though an Offset account is the way to go.
A few questions on off-set accounts :
Do you draw on the Banks money, similar to LOCs, or is it your savings in this account?
Presumably they are at a lower interest rate, but can you get a fixed rate loan (not possible, according to CBA for LOC accounts)?
Presumably they don’t have sub-accounts, so how is the money trail of individual IPs (and personal money) tracked?
Can they be linked to cheque and/or Credit Cards, for payment of say IP deposits or reno expenses?
Another question, slightly off this topic :
The CBA has said that they will match any offer from another lender. My question – if we spoke to a Broker, and were upfront with them about this, with a guarantee that we would finance the balance of future IP purchase price (20% from CBA Off-Set or LOC) with them, would they be interested?
I guess we should just try them!!
Just like to thank everybody who responded. Great advice and much appreciated. I’m seeing a mortgage broker this week and I’ll let you know the results.
I may put the items which weren’t answered on a separate topic in the future sometime.
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