Is this correct and a good approach?
A&B approach their bank manager for a loan to purchase investment property. The bank be happy to lend them up to 90% of their homes value of $220,000. They would have to pay for mortgage insurance. But they want to remain fairly conservative, especially as a first time investment, and decide to borrow only 75% of their homes present value. Banks do not usually require mortgage insurance at this level of borrowing.
The bank agreed to lend them 75% of the value of their home today, a $165,000 loan. But they still have a balance of $50,000, owing on their existing mortgage. If that $50,000 is deducted it leaves a borrowable amount of $115,000 which could be used as a deposit for a further investment property.
The bank manager then has to establish that they can afford to service the total loan out of their income including the rent from the new investment property and the potential tax savings which would result from investment ownership. Providing those tests are met, the bank would lend them $115,000 as the deposit for another property purchase.
If A&B also borrow 75% of the value of the new investment property they intend to acquire, that would give them a total borrowing power of $385,000, which could be used to purchase properties worth $365,000 after allowing for acquisition costs.
Their total property holdings have increased to $585,000 with borrowing’s of $435,000. What they have done is increase their assets and liabilities they will now receive capital growth on property worth $585,000.
Wasp
**************************************************Its not what you earn but what you do with what you earn
Hi WASP,
What you have described is a relatively straight forward approach which is followed by a number of investors.
As for fine tuning the detail here are some comments.
80% Lends
If A and B took out an 80% lend on their existing property it would realise $176K which, after allowing for the existing $50K debt, would provide $126K for deposits on further property.This $126K can be in a line of credit or equity loan and can be drawn upon for deposits and costs for additional properties.
If A and B purchased property at $200K they could purchase and additional two properties (subject to servicing tests) drawing $40K for deposits + $12K costs for each property.
This would provide A and B with a property portfolio of $620K (home + 2 X IP).
Consider the option of being a little braver and borrowing 90%
Using the home as the cornerstone of their investment portfolio they would be able to secure additional borrowings of $198K less the $50K outstanding mortgage leaving $145K for deposits and costs on investment properties. (Note I have allowed $3K for LMI).
Assume A and B were buying $200K properties and borrowing 90% each time.
In this case A and B would be able to purchase 4 properties – each time providing $35K for deposit ($20K) + $15K for costs ($3K for LMI).
The overall effect of using LMI would see A and B now having a property portfolio of $1.2M – including their own home.
Obviously there are individual considerations to be had here as well as LMI policies and servicing calculations to be made that may prevent this from happening.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958Edit – Not a broker so take what I say with a grain of salt.
Thanks Derek
Certainly food for thought
will have to ponder some more
Wasp
**************************************************Its not what you earn but what you do with what you earn
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