All Topics / Finance / Accessing equity for my first IP

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  • Profile photo of brad85brad85
    Participant
    @brad85
    Join Date: 2009
    Post Count: 3

    Hi all,

    I was pointed to this site by a friend who is reaping the benefits of property investing. It looks like a great forum full of gems to help make the best out of property. As seems to be the trend on this forum, as a new property investor, I'm looking for some guidance on the best way to proceed (my objective is to create a capital growth portfolio, adding a new house every 12-18 months).

    I currently have a PPOR here in Perth, 4 bed 2 bathroom, 2 year old home. I borrowed $300,000 IO Fixed for 3 years (11 more months to go and never going 100% fixed again!)

    I'm awaiting bank valuation, but I'm conservatively hoping it will be worth $450,000, so $150k equity. I'm looking at purchasing a property around $280k mark.

    Given the bank will only lend 80% of the value of my PPOR, at a value of 450k, I have 300k already financed on the PPOR and 60k to play with.

    What is my best option for accessing that equity to buy an IP? The bank advises me that I should:
    – Finance 60k from the PPOR equity and 220k against the new property (all in one loan of 280k)
    – Pay the stamp duty out of my own pocket (they say I cannot finance this?)

    If I did this, wouldn't it mean that I'm 100% financed and could not purchase another IP till I have built up more equity?

    Are there any other options?

    Thanks in advance for any advice provided.

    Regards,
    Brad

    Profile photo of MortgagemanMortgageman
    Participant
    @mortgageman
    Join Date: 2004
    Post Count: 164

    Hi Brad and welcome to the forum,

    The way the bank has suggested you structure the loan is basically correct, however it would be advisable to split the loans into two facilities on a stand alone basis rather than have an all in one loan of $280k. This is because you don't want to give the bank  too much control over what you are doing in the future. So what you would do is borrow an extra $60k against your place of residence as an investment loan and then get a seperate facility for $224k against the investment property at 80%. Hope this helps.

    Kind Regards,

    Cameron Perry
    Perry Financial Strategies
    (03) 9662 1999

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Always citically analyse the bank's suggestions cause they are usually not ideal.

    I would get a separate loan for $60,000 from the existing property. This should be IO (loan 2) and secured against your PPOR only. Since your other loan (loan 1) is fixed you may as well set up an offset against this loan. Move the offset to loan 1 as soon as possible.

    Loan 3 would also be interest only and secured against the new property.

    Do not pay the stamp duty from your own pocket as you will be doing yourself a disservice. Borrow it. If you have the cash for stamp duty pay it off loan 1 (your PPOR loan – if you can as it is a fixed loan maybe $10k will be the max without penalty). You want to reduce your non-deductible debt first and then borrow it by increasing loan 2.

    You want to be 105% financed for investment property while you still have a PPOR loan.

    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 brad85brad85
    Participant
    @brad85
    Join Date: 2009
    Post Count: 3

    Thanks for your replies guys.

    I suspected having the 60k in its own loan (loan 2) would actually be better.

    I assume I'd setup an equity access facility which would simply give me access to the entire amount of equity (60k assuming the PPOR is valued at 450k) and mirror loan 1's interest rate, is that normally how it works?

    Furthermore, if I do buy the IP, as all equity in my PPOR would be borrowed against, how do I then buy more properties in future?
    The way I see it, I'm 100% financed and the unless I build up extra equity in either of the two properties, either by growth or my own cash, I'm not going to be able to buy any more.

    Is that correct?

    Regards,
    Brad

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    hi Brad

    Yep that is pretty much it.

    You can try to reduce the use of the loan 2 as much as possible by borrowing 90 or 95% for the 2nd ip, but you will need some more equity to keep going. You can only get this in 2 ways  -capital growth or repaying the loan (make sure it is the non-deductible loan).

    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 MortgagemanMortgageman
    Participant
    @mortgageman
    Join Date: 2004
    Post Count: 164

    Hi Brad,

    Also keep in mind if you borrow more than 80%, you will be up for mortgage insurance, so it would be preferable to keep your borrowings below 80% wherever possible, as this is a big hit for borrowing a relatively small amount extra.

    Kind Regards,

    Cameron Perry
    Perry Financial Strategies
    Ph (03) 9662 1999
    [email protected]

    Profile photo of brad85brad85
    Participant
    @brad85
    Join Date: 2009
    Post Count: 3

    Thanks for the advice guys, much appreciated!

    I am certainly keen to avoid LMI where possible. I am having a meeting with the broker I used when purchasing my PPOR, to get some "non bank" advice on this.

    The thought of finally getting in to investment property is quite exciting.

    Brad

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