I am wanting to build a rental house on existing land and do not know best way to finance this. I currently have:
PPOR Value $320,000 No mortgage
IP Value $210,000 $26,000 mortgage left with 9 years left on loan term
Holiday House $210,000 No mortgage
Vacant Block $140,000 $85,000 mortgage left with 22 years
left on loan termAvailable cash and shares of around $80,000.
I have been paying extra off IP and Land to avoid interest – have held IP for 6 years and land for 2 1/2 years.
Construction costs approx $160,000 all up.
How best to finance – what exactly is equity and how do you use it.
I would also like to be in a position after construction to prehaps buy another established rental property.
Appreciate any advise you can offer [blink]
Hi SOTF
i will not make comment on your existing structure but merely ask the question you posted.
The easiest way is to finance the loan through a standard construction loan secured against the land whereby the lender will advance payments in stages as and when the building progresses.
According to your figures the land is worth $140,000 and the construction costs $160,000 giving a total value of $300,000. If you finance the entire loan your total debt will be $85,000 + $160,000 = $250,000. This is a LVR of 83% and on this basis would incur LMI.
2 ways around this is
1) Either you put in the 3% from you cash resourses as you appear to paying P & I on these loans.
2) You X collaralise the securities (not my favoured course of action) and get the lender to advance 100% of the contruction amount without LMI.If you want to look to purchase further IP’s then Option 2 is probably not the best way around it and the loan would need a bit of re-structuring.
I assume that your $80,000 is being placed in an offset account.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Thank you Qlds007 (Richard)
I think option (1) is the best way to go to avoid LMI.
I was thinking i might pay off the $26,000 owing on the IP and put those mortgage repayments as extra payments towards the new house. This would mean $10,000 to avoid LMI plus $26,000 pay out IP loan – leaving approx. $44,000 in hand. Does this make sense?
Yes I do use an off-set account at present on both the IP and Land loans with other monies – this fluctuations $20,000 to $45,000 monthly.
Yes it does make sense but in saying that i am more of an interest only man with offset than a P & I loan.
Just remember once you have paid it off you are unable to get it back again and claim the tax deduction. If you leave it in the offset account you can always get it back.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
It sounds like Richard has once again come up with a great solution.
To get back to your original question though of “What is equity?”
Equity is the difference between your total property value (Assets)and total mortgage (Debts) . Hopefully Assets are higher than Debt!!
AmandaBS
http://www.propertydivas.com.au
FREE online Property Resources“It is better to be inconspicuously wealthy, than to be ostentatiously poor…”
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