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Viewing 8 posts - 1 through 8 (of 8 total)
  • Profile photo of rudra_rrudra_r
    Participant
    @rudra_r
    Join Date: 2009
    Post Count: 61

    Hi all,

    I’m currently in the process of refinancing my PPOR which should release between 70k and 80k in equity. If this goes ahead without any problems then according to a serviceability check done by a broker I should be entitled to borrow up to 230k for my 2nd IP (this would be more if I reduced limits on my credit cards or cancelled one, never paid interest on a credit card before).

    At present I still have a home loan which I expect to reduce by 20k to 40k by the end of this financial year.

    Now based on this, my initial plan was to look at properties in my area between 230k and 250k where the rental returns range from $280 to $320 pw and put up a 20% deposit from the equity released from my PPOR to avoid LMI. However reading the forums I’m wondering if this is a good idea or would I be better to put up a 5% – 15% deposit and pay the LMI to allow me to possibly buy more than 1 IP.

    Cheers
    Rudra

    Profile photo of CatalystCatalyst
    Participant
    @catalyst
    Join Date: 2008
    Post Count: 1,404

    Either way works. It's just what you are comfortable with. If you plan to buy more the extra equity will be handy. But if you are paying down your mortgage quickly you'll have extra equity anyway. Depends how fast you want to expand and your risk profile. Also you should have a cash buffer for when things don't go to plan. LMI is tax deductable.
    Personally I like a lower LVR, especially in uncertain times.

    Profile photo of rudra_rrudra_r
    Participant
    @rudra_r
    Join Date: 2009
    Post Count: 61

    Hi Catalyst,

    Thanks for that, realistically I’m not in a great rush to expand as I am only 24. However what I have found is recently is that I will find property that according to my calculations are close to neutral but can’t act on it as I don’t have the funds at the ready. Hence what i was thinking is to buy my 2nd IP in the first half of next year with a LVR of 90% which will leave enough left over to be able to act quickly at a later date if need be. The money would be sitting in the offset account so I’m not paying unnecessary interest on it, but is quick accessible.

    Cheers
    Rudra

    Profile photo of Chris VerbeckChris Verbeck
    Participant
    @chris-verbeck
    Join Date: 2011
    Post Count: 6

    Hey Rudra,

    Here are some comparisons between a 95% LVR and 80% LVR, based on the following assumptions:

    – Purchase Price $230,000
    – Loan of 6.8%, interest only, over 30 years
    – Rental Return $320 pw (assume 1 week of vacancy per year)
    – In Victoria
    – Purchase costs include loan application fee, stamp duty, LMI, building/pest inspection, legal fees etc.
    – Ongoing costs include council rates, real estate management fee %, strata levies, insurance, some small maintenance etc.

    Ok for a 95% LVR
    – Savings required to buy approx $28,200 (11.5k deposit & 16.5k purchase costs), this includes $4,215 for LMI
    – Cashflow per year -$3450, i.e. will cost you an extra 3.5k onto of your rental return
    – Return on Investment -12.3%, it is negative so you would be hoping for capital gains

    80% LVR
    -Savings required to buy approx $58,500 (46k deposit and approx $12.5kk purchase costs), LMI is now $0
    – Cashflow per year $1,123 i.e. will cost you just over a grand per year to own this property
    – Return on investment -1.9%, still negative so hope for capital gains.

    Pros/Cons of 95% LVR
    – Much lower cost to acquire the property
    – You will have to contribute more per year to repayments etc.
    – Return on investment is worse than 80% LVR

    Pros/Cons of 80% LVR
    – High cost to acquire
    – Contribute less per year
    – Return on investment is better

    Hope this helps mate.

    Profile photo of Dazz28Dazz28
    Participant
    @dazz28
    Join Date: 2010
    Post Count: 19

    The numbers above are not really accurate. If your using equity to fund the deposit your effectively borrowing 100% plus costs. So work out your return taking this into account.

    Profile photo of rudra_rrudra_r
    Participant
    @rudra_r
    Join Date: 2009
    Post Count: 61

    Hi Chris,

    I will be using equity for the deposit so essentially I am borrowing 100% plus costs, I guess the real difference here is where funds are secured against. Do I try secure a majority against the new IP and pay LMI or do I stick with the 80% and use the equity funds for the 20% deposit and costs.

    Cheers
    Rudra

    Profile photo of Chris VerbeckChris Verbeck
    Participant
    @chris-verbeck
    Join Date: 2011
    Post Count: 6

    Rudra,

    Yea Dazza the numbers above work for new purchases not refinancing.

    For your situation Rudra I think it comes down to your confidence in the property market, if you want to leverage up then pay the LMI and potentially buy multiple properties. Also consider your serivcability of the loans, as they are not positively geared.

    Personally I wouldn’t want to contribute too much of my income to mortgage repayments in the current market. I prefer cash-flow positive property so that my lifestyle isn’t compromised by additional purchases.

    ps. Cross-collateralization of your loans may pose problems down the track if you intend to build a substantial portfolio.

    Profile photo of rudra_rrudra_r
    Participant
    @rudra_r
    Join Date: 2009
    Post Count: 61

    Hi Chris,

    My PPOR and current IP are with separate banks so there is no cross-collateralisation and the new property will not be cross-collateraised with any of the existing properties. What I am doing is getting a loan form my current bank and taking that money to another bank for my 2nd IP.

    I recognise my serviceability will be hit, but realise finding positively geared property will be hard given at this point I am using equity as the deposit. I earn a decent salary and as such my lifestyle won’t be comprimised by having to contribute a small amount which I have worked out to be between $150 and $200 a week based on conservative rental returns and an interest rate of 8% (I always look at worse case scenario). Taking into account negative gearing this would be reduced to between $70 and $125 per week.

    Once my mortgage is paid off which I expect sometime in 2012 it will be a lot easier, as I can put my money into the IP’s.

    Cheers
    Rudra

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