All Topics / Help Needed! / How equity contributes to home loan?

Viewing 20 posts - 1 through 20 (of 22 total)
  • Profile photo of lamp1111lamp1111
    Member
    @lamp1111
    Join Date: 2011
    Post Count: 17

    Hi All,

    I am so thankful for a pool of great information each of you shared in this forum, which really helps especially inexperienced (potential) investor like me.

    I've read a number of comments regarding using the equity to buy an investment property, but I am still confused about how exactly I can use it. I hope that someone can provide some direction to me as to whether I stand the chance now to get in the property investment market (for the first time).

    OK, my current situation as follows:
    – Have a 2 bedrooms, 2 carspace, 1 bathroom unit  (residential property) in Ringwood, Vic, purchased in 2006 costed almost $200K (not sure what is the current worth, hopefully it has gone up);
    – I'm still owning about $44K in mortage; 
    – I want to buy an investment property worth approx $360K
    – I am employed and annual income $84K

    My question:
    – If my current property has increased in value to $250k, then my equity = ($250K(current value) – $44K (outstanding) = $206K),  is this the same as the loan I can obtain from the bank for the investment proeprty or is the equity and loan different (i.e. using the equity as the 20% deposit for the IP and I can still obtain a loan base on my annual income)?
    – If I use the 80% equity of my current home, does that mean the mortgage of my home is increase?

    Sorry, my questions may be very stupid and confusing ! I am trying to sort out the concepts, hopefully I can go to the bank and at least have some basic understand…and can explain to them what I want..Thanks in advance!!

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069

    Hi Lamp

    Easiest way to go about it is:

    You increase your current loan by an amount that is 20% of the purchase price of the IP ($72k) + purchasing costs. Let’s say, for a nice round figure that it’s $90k.

    You would set this up as a second split to your existing loan (ie. split 1 being your existing PPOR loan and split 2 being your loan for the IP deposit).

    You would then take out a loan for the remaining 80% for the IP.

    Hope that helps

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of lamp1111lamp1111
    Member
    @lamp1111
    Join Date: 2011
    Post Count: 17

    Thanks Jamie.

    My current home loan account is an offset account type, which I can access my money anytime, in this case, can I just take out the 20% from this offset account without increasing the loan of my current property? I then borrow the 80% from a different bank?

    Cheers,
    Lamp

    Profile photo of luke86luke86
    Participant
    @luke86
    Join Date: 2010
    Post Count: 470

    Jamie or another broker would be able to offer some good advice on this one.

    I think you are better off paying the money into your loan in this case and then redrawing via a LOC or a split on your loan. This will maximise the tax deductability of the new borrowings. Of course you dont invest for tax reasons, but if you are going to invest then you may as well maximise the taxation benefits.

    But definitely talk to a mortgage broker or an accountant before doing anything. Perhaps give Jamie a ring for a chat!!

    Cheers,
    Luke

    Profile photo of Alistair PerryAlistair Perry
    Participant
    @aperry
    Join Date: 2004
    Post Count: 891

    Hi Lamp1111,

    You have received good advice from Jamie. I suggest you contact him or one of the other great brokers on this site to help you set up your loans properly. By borrowing the deposit ijn a split facility you will be maximising the % of your overall debt that is tax deductable, doing anthing but this will cost you money for no benefit.

    Regards
    Alistair

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    lamp1111 wrote:
    Thanks Jamie.

    My current home loan account is an offset account type, which I can access my money anytime, in this case, can I just take out the 20% from this offset account without increasing the loan of my current property? I then borrow the 80% from a different bank?

    Cheers,
    Lamp

    Hi Lamp

    I agree with the other guys. I’d borrow against your PPOR for the deposit and purchasing costs – this will make your total borrowings for the IP tax deductible (if you used a large cash deposit, only 80% would be deductible).

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of lamp1111lamp1111
    Member
    @lamp1111
    Join Date: 2011
    Post Count: 17

    Hi guys,

     I am so glad that I read Jamie’s advice before seeing the bank manager yesterday! The manager told me that I can borrow in two ways; 1. Borrow all from their bank; 2. Same as what Jamie told me J Initially, I didn’t quite understand why, but after further elaboration from you guys and my digestion system worked over night (couldn't sleep), it makes more sense to me now, I’m so happy that I’ve learn new thing. Thanks guys.

    I just got my current bank HSBC approved to lend me 25% of the proposed value of the potential IP today. I am thinking that the 5% (in case) may be used for renovation and other settlement costs. Westpac is happy to lend me the 80% as well J

    Now it comes to the next challenge, I was initially considering IP from the National Rental Affordability Scheme (NRAS), put a posting in another thread and got infomation from Jamie too , this scheme is still very new to Victorian, currently, new development will be started in Casey, Victoria, and expected completion in Aug 2012 (17 months later), I’ve looked at the information from the developer, the apartments look very nice (cost about $370K) and I drove to the suburb to learn about the area after work yesterday, not bad either. But I learned from Steve McKnight’s books and other members of this forum that mostly investors talk about purchasing old IP and renovate to leverage the value in order to rent / sell. I’m also considering old units and renovate. My query is which in fact is more sounded? Old unit (under 350K which requires renovation and look for tenant, current area I'm looking should not be short of tenant, but the rental will not put me in a postively geared position, I cannot afford to look for other suburbs due to budget) or new apartment (approx. 370K) with rental guaranteed but government restrictions and new concept?? Initial thinking is to hold the property for 5 years then revise if sell or keep.

     Cheers,

    Lamp

    Profile photo of luke86luke86
    Participant
    @luke86
    Join Date: 2010
    Post Count: 470
    lamp1111 wrote:


    I just got my current bank HSBC approved to lend me 25% of the proposed value of the potential IP today. I am thinking that the 5% (in case) may be used for renovation and other settlement costs. Westpac is happy to lend me the 80% as well J

    5% for purchasing costs is ok, but you will not have much money left over if you want to do a renovation as well.

    Cheers,
    Luke

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    lamp1111 wrote:

    Hi guys,

     I am so glad that I read Jamie’s advice before seeing the bank manager yesterday! The manager told me that I can borrow in two ways; 1. Borrow all from their bank; 2. Same as what Jamie told me J Initially, I didn’t quite understand why, but after further elaboration from you guys and my digestion system worked over night (couldn't sleep), it makes more sense to me now, I’m so happy that I’ve learn new thing. Thanks guys.

    I just got my current bank HSBC approved to lend me 25% of the proposed value of the potential IP today. I am thinking that the 5% (in case) may be used for renovation and other settlement costs. Westpac is happy to lend me the 80% as well J

    Now it comes to the next challenge, I was initially considering IP from the National Rental Affordability Scheme (NRAS), put a posting in another thread and got infomation from Jamie too , this scheme is still very new to Victorian, currently, new development will be started in Casey, Victoria, and expected completion in Aug 2012 (17 months later), I’ve looked at the information from the developer, the apartments look very nice (cost about $370K) and I drove to the suburb to learn about the area after work yesterday, not bad either. But I learned from Steve McKnight’s books and other members of this forum that mostly investors talk about purchasing old IP and renovate to leverage the value in order to rent / sell. I’m also considering old units and renovate. My query is which in fact is more sounded? Old unit (under 350K which requires renovation and look for tenant, current area I'm looking should not be short of tenant, but the rental will not put me in a postively geared position, I cannot afford to look for other suburbs due to budget) or new apartment (approx. 370K) with rental guaranteed but government restrictions and new concept?? Initial thinking is to hold the property for 5 years then revise if sell or keep.

     Cheers,

    Lamp

    Hi Lamp

    That’s great news. I’m glad to hear it all worked out.

    All the best

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of lamp1111lamp1111
    Member
    @lamp1111
    Join Date: 2011
    Post Count: 17

    Hi just visit HSBC again, where I got my property home loan from. The bank manager offered that HSBC can open a new IP loan for me, therefore 100% of the loan required for my IP can be borrow from there and my existing home loan is untouched.

    Loan 1 – existing home loan
    Loan 2 – IP loan offers as a package for 100% of $320K, interest rate 7.17%, montly repayment $1995

    Should I go for this option?

    Profile photo of lamp1111lamp1111
    Member
    @lamp1111
    Join Date: 2011
    Post Count: 17
    lamp1111 wrote:
    Hi just visit HSBC again, where I got my property home loan from. The bank manager offered that HSBC can open a new IP loan for me, therefore 100% of the loan required for my IP can be borrow from there and my existing home loan is untouched.

    Loan 1 – existing home loan
    Loan 2 – IP loan offers as a package for 100% of $320K, interest rate 7.17%, montly repayment $1995

    Should I go for this option?

    Additional information:
    If I go for the structure as suggested from you guys the interest allocation will be as followed:

    Increase amount borrowed from existing mortagage (from HSBC) and split into 2:
    Split 1 – existing mortage – no change
    SPlit 2 – 25% deposit to be used towards the IP (interest rate7.8%)

    Then borrowint the 80% from Westpac (interest rate 7.16%)

    I want to know what is the IMPLICATION of what the HSBC manager suggested to me today to go for ther package of open a separate Investment Loan to borrow 100% of the value of the IP (no lender insurance is required), monthly interest is discount from 7.8% to 7.17% which the monthly repayment works out to be $1995.

    Thanks Lamp

    Profile photo of luke86luke86
    Participant
    @luke86
    Join Date: 2010
    Post Count: 470

    It sounds like they want to cross your loans which is not ideal. A better option for most people is to use the LOC as suggested earlier.

    Cheers,
    Luke

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    lamp1111 wrote:
    Additional information:
    If I go for the structure as suggested from you guys the interest allocation will be as followed:

    Increase amount borrowed from existing mortagage (from HSBC) and split into 2:
    Split 1 – existing mortage – no change
    SPlit 2 – 25% deposit to be used towards the IP (interest rate7.8%)

    Then borrowint the 80% from Westpac (interest rate 7.16%)

    I want to know what is the IMPLICATION of what the HSBC manager suggested to me today to go for ther package of open a separate Investment Loan to borrow 100% of the value of the IP (no lender insurance is required), monthly interest is discount from 7.8% to 7.17% which the monthly repayment works out to be $1995.

    Thanks Lamp

    Because your securities will be crossed. It might be difficult to access equity later (it will likely require a valuation of both properties instead of one). If you sell one property in the future, the bank may ask you to use the proceeds from the sale to pay down the other debt. These are just a couple of the issues of the top of my head associated with crossing.

    Cross collaterising isn’t a problem until it becomes a problem (then it’s not pretty).

    I’d also question why they can’t offer you the same 7.17% rate on the second split. If you’ve already got an IP lined up – just ask for that second split to be the same product as the first (albeit with IO).

    In any case, it’s not always about rate. If you’re planning on purchasing more IPs in the future it would be wise to correctly structure your finances from the start. That small saving on rate could result in lost opportunities in the future.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of lamp1111lamp1111
    Member
    @lamp1111
    Join Date: 2011
    Post Count: 17

    Really really thankful for the advice guys, I was feeling  that the bank manager was trying to avoid using terms like "cross loans"….. I could just blinked my eyes without knowing what question to ask (even when feeling that there must be some implication about this appears to be like an hassel free way) when she told me that they will lend me the 100% on the IP…!!! Thanks again.

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    lamp1111 wrote:
    Really really thankful for the advice guys, I was feeling  that the bank manager was trying to avoid using terms like "cross loans"….. I could just blinked my eyes without knowing what question to ask (even when feeling that there must be some implication about this appears to be like an hassel free way) when she told me that they will lend me the 100% on the IP…!!! Thanks again.

    No worries at all Lamp.

    One thing I do question is – if you’re so concerned about rate why are you going to Westpac for the IP loan? Unless the borrowing capacity is lean, there are better deals out there.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of lamp1111lamp1111
    Member
    @lamp1111
    Join Date: 2011
    Post Count: 17

    Yes Jamie, I am getting 80% of my IP loan from Westpac, just got the loan entitlement 2hrs ago.  One of there financial consultant just told me that when I got the remaining from HSBC (where my Home is with), I should split the additional borrowing from the existing home loan (we have been talking about this in this forum), in addition, he suggested that I should borrow all I can, say if my equaity allows me to borrow $200K, I should borrow all instead of the 25% I need in an offset account. He suggested this in the context of unexpected financial hardship (e.g. loosing a job and no rental income), which this arrangment will help, but I jusHSt don't understand how and why! I'm feeling more and more confused now, I just asked the  HSBC manager to put my 25% loan (eqauity) application on hold as I'm confused and lost by the different package/products, etc. Why is it so difficult!!!

    Profile photo of luke86luke86
    Participant
    @luke86
    Join Date: 2010
    Post Count: 470

    Lamp,

    You sound very confused. I suggest you call Jamie to help you wort it out.

    Cheers,
    Luke

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    lamp1111 wrote:
    Why is it so difficult!!!

    That's why a lot of investors surround themselves with a team of knowledgable professionals (accountant, mortgage broker, conveyancer/solicitor).

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of lamp1111lamp1111
    Member
    @lamp1111
    Join Date: 2011
    Post Count: 17

    I agree with you Jamie, if we want to properly invest, we should always have experienced professionals in the area to guide us. I wish you are in Victoria Jamie. I am now putting a pause, no point to rush into investing in IP unless I have a team of professionals as suggested by you, even my world of investing in IP is very small in comparison to most investors. I am going to find some good accountant, mortgage broker and financial planner in Victoria =) You guys are brillant, just in the last week, I have already learned so much from your advices and help. I know that there are far more for me to learn but you guys have open another level of my thinking. Thank you 

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,069
    lamp1111 wrote:

    I agree with you Jamie, if we want to properly invest, we should always have experienced professionals in the area to guide us. I wish you are in Victoria Jamie. I am now putting a pause, no point to rush into investing in IP unless I have a team of professionals as suggested by you, even my world of investing in IP is very small in comparison to most investors. I am going to find some good accountant, mortgage broker and financial planner in Victoria =) You guys are brillant, just in the last week, I have already learned so much from your advices and help. I know that there are far more for me to learn but you guys have open another level of my thinking. Thank you 

    Hi Lamp

    I have a fair share of clients in Victoria – and every other state.

    If you'd like a broker that you can deal with face to face – I highly recommend Peter Tersteeg from Sage Lending in Nunwading.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
    Email Me | Phone Me

    Mortgage Broker assisting clients Australia wide Email: [email protected]

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