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

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  • Profile photo of euro73euro73
    Member
    @euro73
    Join Date: 2009
    Post Count: 60
    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

    Lamp, you mentioned that you are considering buying an older unit and renovating, OR purchasing an NRAS approved unit within the Casey Gardens development.  I personally believe the NRAS scheme offers you far more, but its really your decision. Respectfully, it doesnt sound like you have much experience or knowledge about the basics of investment property, or investment property finance, so taking on a renovation may not be for you. Purchasing something new, with great tax incentives attached, which will basically be set and forget as you learn what you are doing, may make life far simpler. But do your own research and decide which better suits your knowledge and risk appetite. Ultimately its your choice. If you decide to purchase the Casey Gardens unit, please understand that it creates some unique issues for you to consider;
    1. The NRAS consortium that owns the NRAS allocations for Casey Gardens is Providence Housing. 
    2. You would be required to enter into a Head lease Agreement with Providence Housing to enter the property into the NRAS
    3. The purchase will be Off The Plan 
    4. You will require unconditional finance or cash for a 10% deposit, as Providence Housing does not accept deposit bonds

    I know the development well and you are right in saying that the units are very good quality. They will offer excellent depreciation, are well priced and will easily be tenanted.  They should also offer strong growth- but none of us has a crystal ball on that. What I do know is that HSBC will NOT lend to you for an NRAS purchase. You can ask Westpac or St George or NAB ( all three will lend on NRAS to varying degrees) but I dont think they'll do it for you either. Non of them offer funding for the Providence Housing model- yet. Im sure they will in future, but they dont right now. Providence is a very new NRAS model, so the banks havent had much of a chance to due their due diligence yet. However- one lender can assist. The ONLY lender that offers NRAS funding, AND unconditional approvals for Off The Plan is firstmac. 
    https://www.firstmac.com.au/Pages/Easy%20Livez%20-%20NRAS%20loan.aspx
    Of course- the other advantage is that firstmac uses 100% of the NRAS incentive towards servicing – none of the other NRAS lenders do this- so they will offer you much better borrowing capacity.

    So IF  you decide to take the NRAS path, you would need to consider do the following;

    1. You could access some of the equity in your existing property by doing an increase with your existing lender for 20% plus costs, stamp duty, legals etc (approx 90K total) for the 370K NRAS purchase, and set this up as Jamie has suggested- an Interest Only split – secured by your PPOR,  OR,  I'd actually suggest something a little different- I'd refinance and consider something like this –
    https://www.loans.com.au/Pages/Home-Loans.aspx 
    If you set the loan up as Jamie has suggested, you are only using a very small amount of your equity. Thats great, and if you have plans to use further equity for another Investment purchase ( NRAS or non NRAS) Jamies recommendation is spot on, because you can do a further equity release ( subject to your ability to qualify for the loan)  to purchase another investment property at a later time. However, if you do not intend to use the remaining equity in your PPOR for a further investment purchase at any time in the next 4 or 5years, I would recommend a slightly different solution. I would refinance to one of the providers above ( to access a rate of 6.85%) and set the loan up as follows; assuming your PPOR is now worth 350K.
    Split 1 –  44K Principle and Interest @ 6.85% with 100% Offset
    Split 2 –  236K 10 years  Interest Only @ 6.85%
    This would mean that your PPOR was geared to 80% LVR, but  you would then only need a loan for 134K plus costs ( lets say 15-20K)  – so 154K, against the NRAS security – ie @ 42% LVR.   In a nutshell, you'd still be funding 100% plus costs for the investment purchase, but more of your debt would be at 6.85% Interest Only, so this would mean cheaper repayments and better cash flow for you.

    So much of the "art" of property investment is in managing cash flow and using the right finance products to assist you in reaching your goals. With an income of 84K, I think cash flow will be critical for you as you take on debt, so my suggestion is worth considering.

    Of course, if you dont go with NRAS – ignore this post completely :)

    Profile photo of lamp1111lamp1111
    Member
    @lamp1111
    Join Date: 2011
    Post Count: 17
    euro73 wrote:

    Lamp, you mentioned that you are considering buying an older unit and renovating, OR purchasing an NRAS approved unit within the Casey Gardens development.  I personally believe the NRAS scheme offers you far more, but its really your decision. Respectfully, it doesnt sound like you have much experience or knowledge about the basics of investment property, or investment property finance, so taking on a renovation may not be for you. Purchasing something new, with great tax incentives attached, which will basically be set and forget as you learn what you are doing, may make life far simpler. But do your own research and decide which better suits your knowledge and risk appetite. Ultimately its your choice. If you decide to purchase the Casey Gardens unit, please understand that it creates some unique issues for you to consider;
    1. The NRAS consortium that owns the NRAS allocations for Casey Gardens is Providence Housing. 
    2. You would be required to enter into a Head lease Agreement with Providence Housing to enter the property into the NRAS
    3. The purchase will be Off The Plan 
    4. You will require unconditional finance or cash for a 10% deposit, as Providence Housing does not accept deposit bonds

    I know the development well and you are right in saying that the units are very good quality. They will offer excellent depreciation, are well priced and will easily be tenanted.  They should also offer strong growth- but none of us has a crystal ball on that. What I do know is that HSBC will NOT lend to you for an NRAS purchase. You can ask Westpac or St George or NAB ( all three will lend on NRAS to varying degrees) but I dont think they'll do it for you either. Non of them offer funding for the Providence Housing model- yet. Im sure they will in future, but they dont right now. Providence is a very new NRAS model, so the banks havent had much of a chance to due their due diligence yet. However- one lender can assist. The ONLY lender that offers NRAS funding, AND unconditional approvals for Off The Plan is firstmac. 
    https://www.firstmac.com.au/Pages/Easy%20Livez%20-%20NRAS%20loan.aspx
    Of course- the other advantage is that firstmac uses 100% of the NRAS incentive towards servicing – none of the other NRAS lenders do this- so they will offer you much better borrowing capacity.

    So IF  you decide to take the NRAS path, you would need to consider do the following;

    1. You could access some of the equity in your existing property by doing an increase with your existing lender for 20% plus costs, stamp duty, legals etc (approx 90K total) for the 370K NRAS purchase, and set this up as Jamie has suggested- an Interest Only split – secured by your PPOR,  OR,  I'd actually suggest something a little different- I'd refinance and consider something like this –
    https://www.loans.com.au/Pages/Home-Loans.aspx 
    If you set the loan up as Jamie has suggested, you are only using a very small amount of your equity. Thats great, and if you have plans to use further equity for another Investment purchase ( NRAS or non NRAS) Jamies recommendation is spot on, because you can do a further equity release ( subject to your ability to qualify for the loan)  to purchase another investment property at a later time. However, if you do not intend to use the remaining equity in your PPOR for a further investment purchase at any time in the next 4 or 5years, I would recommend a slightly different solution. I would refinance to one of the providers above ( to access a rate of 6.85%) and set the loan up as follows; assuming your PPOR is now worth 350K.
    Split 1 –  44K Principle and Interest @ 6.85% with 100% Offset
    Split 2 –  236K 10 years  Interest Only @ 6.85%
    This would mean that your PPOR was geared to 80% LVR, but  you would then only need a loan for 134K plus costs ( lets say 15-20K)  – so 154K, against the NRAS security – ie @ 42% LVR.   In a nutshell, you'd still be funding 100% plus costs for the investment purchase, but more of your debt would be at 6.85% Interest Only, so this would mean cheaper repayments and better cash flow for you.

    So much of the "art" of property investment is in managing cash flow and using the right finance products to assist you in reaching your goals. With an income of 84K, I think cash flow will be critical for you as you take on debt, so my suggestion is worth considering.

    Of course, if you dont go with NRAS – ignore this post completely :)

    Hi euro73,

    Thanks so much for the analysis and advice, definitely given me valuable information about different options and more into the NRAS, I haven't given up on NRAS. You're right, cashflow is critical for me as I don't want to stretch myself to far and feeling stressful at the end of the day. I'm evaluating the worse scenario and see if I can cope with investing in IP, as earning 84K in fact is not a lot, I may have to consider having my salary increased to a level before dipping into property investment, meanwhile, I am taking in all info provided by you guys to gain more knowledge in the area and hopefully, by the time I get into the market, I have better idea about where I'm steering myself to

Viewing 2 posts - 21 through 22 (of 22 total)

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