All Topics / Finance / The best way to release equity….for IP2

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  • Profile photo of s0805s0805
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    @s0805
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    Currently I have 2 properties (IP 1 + PPOR)….looking to add another IP to portfolio. Both properties have increase in value allowing me to dip into equity for each

    which should help me fund deposit+legals for the IP 2, and this way funds released will be eligible for tax deductions as well….

    Just wondering how do brokers here recommend this setup…I mean do i setup separate loan accounts for each equity release ( i.e. Equity release from PPOR to Loan 1 & Equity release from IP 1 to Loan2) or should i setup both equity release in one Loan account (i.e. Equity release from PPOR & IP in Loan 1)…..

    I can see separate loan accounts could end up having so many loan accounts if one reaches to portfolio of 5 properties…..but releasing equity to one loan account, is it cross X?

    Also, i am planning to borrow 90% of both equities so will be liable for LMI…..from tax perspective LMI on PPOR and PI 1 will be tax deductible or not?

    thanks for your help….

    Profile photo of TerrywTerryw
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    LMI wouldn't be deductible in full because part of it would relate to the existing properties. Probably base it on a % of the total amount borrowed.

    I would suggest you get a LOC on each property – ideally. If small amounts this may not be practical.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of TheFinanceShopTheFinanceShop
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    Get your broker to order some upfront valuations (different valuers and different ypes of valuations – i.e. kerbside, full valuation and modelled estimates). You may access the equity you need and not need to go to 90% and pay LMI.

    Re the equity releases – how you actually do it will somewhat depend on the lender (and their limitations). I would generally go for an standard product with a linked offset and I would do this for each loan account or do it as a redraw as some lenders like ING , Citibank, etc have restrictions in the number of offset each client can have or they charge you for additional offsets (like ANZ).  Lenders like Westpac have unlimited offsets. Most lenders charge a premium for the LOC product and some dont (like Macquarie) so if you were with Macquarie I would set it up as a LOC and then convert it once you have access the funds. 

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    Profile photo of s0805s0805
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    Terryw wrote:
    LMI wouldn't be deductible in full because part of it would relate to the existing properties. Probably base it on a % of the total amount borrowed.

    Terry, I am borrowing upto 90% off existing properties (1 PPOR & 1 IP) to fund my second IP….which is for investment purposes. In that case shouldn't LMI on both PPOR and IP1 be tax deductible? or in ATO's eyes PPOR LMI will not be tax deductible as it is PPOR but IP 1 would be? How do ATO sees this arrangement?

    thanks

    Profile photo of s0805s0805
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    TheFinanceShop wrote:
    I would generally go for an standard product with a linked offset and I would do this for each loan account or do it as a redraw as some lenders like 

    Shahin,  valuation is on to do list……but i m sure that I'll have to go up to 90% this time……standard product with offset is my preferred method as well…..similar to what I've done for IP1. I'm with ANZ and they will charge me extra for additional offset outside of my package fees….

    My concern is that if I setup separate loan for each equity release on my investment journey then i will be end up having plenty of loan accounts and ofcourse multiple offset accounts……note that i've already released equity for my first IP in Loan 1 account from PPOR…..can I top that off rather than creating Loan 2 for the equity release from PPOR this time…..atleast in this case each property will have its own equity release loan account….which i can top up throughout my journey…..thoughts???

    Profile photo of TerrywTerryw
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    s0805 wrote:
    Terryw wrote:
    LMI wouldn't be deductible in full because part of it would relate to the existing properties. Probably base it on a % of the total amount borrowed.

    Terry, I am borrowing upto 90% off existing properties (1 PPOR & 1 IP) to fund my second IP….which is for investment purposes. In that case shouldn't LMI on both PPOR and IP1 be tax deductible? or in ATO's eyes PPOR LMI will not be tax deductible as it is PPOR but IP 1 would be? How do ATO sees this arrangement?

    thanks

    Possibly, best to check with your accountant

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of TerrywTerryw
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    s0805 wrote:
    TheFinanceShop wrote:
    I would generally go for an standard product with a linked offset and I would do this for each loan account or do it as a redraw as some lenders like 

    Shahin,  valuation is on to do list……but i m sure that I'll have to go up to 90% this time……standard product with offset is my preferred method as well…..similar to what I've done for IP1. I'm with ANZ and they will charge me extra for additional offset outside of my package fees….

    My concern is that if I setup separate loan for each equity release on my investment journey then i will be end up having plenty of loan accounts and ofcourse multiple offset accounts……note that i've already released equity for my first IP in Loan 1 account from PPOR…..can I top that off rather than creating Loan 2 for the equity release from PPOR this time…..atleast in this case each property will have its own equity release loan account….which i can top up throughout my journey…..thoughts???

    ANZ will not deposit the borrowed amount back into the loan so you need a separate account.

    I would still suggest a LOC loan and don't worry about having too many, these could be consolidated when more equity develops in the future.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of TheFinanceShopTheFinanceShop
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    Is there a reason why you are with ANZ? Did you previously pay LMI with them?

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    Profile photo of s0805s0805
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    Terry, I want to avoid LOC if possible, i understand that it gives much more flexibility from the top off point of view….but it comes with higher interest rate……

    Shahin….I've been  with ANZ from ages….and their breakfree package (similar to all Big 4 offers) suits me…..and i did not pay LMI on PPOR or PI1……they have discounted abt  0.91 on my 595K+ borrowings…..

    Profile photo of TerrywTerryw
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    s0805 wrote:
    Terry, I want to avoid LOC if possible, i understand that it gives much more flexibility from the top off point of view….but it comes with higher interest rate……

    .

    It will be a small amount and not of any significance. The LOC can be rolled over into a normal IO loan once drawn too.

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    Profile photo of TheFinanceShopTheFinanceShop
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    Rate is good. Can you do better? Yes. Should you move because you can get a better rate? No.

    But you should consider moving if another lender gives you the same deal or better deal plus and more importantly a stronger valuation (in turn more equity).

    I guess the question is why pay LMI if you don't need to?

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    Profile photo of s0805s0805
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    Terryw wrote:

    It will be a small amount and not of any significance. The LOC can be rolled over into a normal IO loan once drawn too.

    Terry, is it possible to have one LOC where all the equity from PPOR, IP1, IP2…….IP6 and so on can be released as required….If that is the case then i can convert LOC to IO once it is used and repeat the process whenever I am ready to make another purchase…..in that way basically I am paying higher interest only for the time I am doing my DD…but i wonder if converting LOC to IO will be smooth and fully supported by bank……what's the success rate of converting LOC to IO…..there has to be some T&C i would believe….

    TheFinanceShop wrote:
    Rate is good. Can you do better? Yes. Should you move because you can get a better rate? No.

    But you should consider moving if another lender gives you the same deal or better deal plus and more importantly a stronger valuation (in turn more equity).

    I guess the question is why pay LMI if you don't need to?

    Shahin, which lender from ur exp u reckon can provider better rate than ANZ on 595K+borrowings….curious any Big of 4….

    I am in all favor of avoiding LMI but last year's valuation tells me that I will have to go further…..

    Profile photo of TerrywTerryw
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    You could have one big LOC but, this would mean it is secured by each property which is cross collateralising.

    These sorts of issues arise in the early days when the investors are trying to get access to equity quickly, but after a while things will slow down as more property is purchased and harvesting equity slows down a bit.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of TheFinanceShopTheFinanceShop
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    Some lenders like Suncorp, St George and Macquarie allows you to easy create sub accounts. 

    If we are talking about a loan amount of $595k  then Westpac will do 4.97% (plus $1,000 cashback), CBA will do 4.95%, Homeside (NAB) will do 4.94%. 

    Second tiers lenders will even go lower but again don't focus on rate – focus on who will give you the most equity.

    If you are with ANZ try doing a modelled val first.

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    Profile photo of s0805s0805
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    Terryw wrote:
    You could have one big LOC but, this would mean it is secured by each property which is cross collateralising.

    These sorts of issues arise in the early days when the investors are trying to get access to equity quickly, but after a while things will slow down as more property is purchased and harvesting equity slows down a bit.

    reading plenty of forums…and one message i got out of them is to avoid cross collateralising. So basically i would have to have separate facilities for each equity release throughout portfolio…..

    Not sure about your other comment Terry, that this sort of issues are only faced in early days of investiing…….i think if you are going to avoid cross collateralising then separate facilities has to be setup to fund the next purchase….until one of your property has enough equity so you don't have to dip in to the other one…..is that what you meant….

    Profile photo of TerrywTerryw
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    s0805 wrote:
    Terryw wrote:

    Not sure about your other comment Terry, that this sort of issues are only faced in early days of investiing…….i think if you are going to avoid cross collateralising then separate facilities has to be setup to fund the next purchase….until one of your property has enough equity so you don't have to dip in to the other one…..is that what you meant….

    No, it is possible to do all without crossing at any stage. But in the early days cash is tight and equity is tighter, so clients often try to access equity and take out little bits at a time. After a while growth kicks in and you might take one property up to 80% and by the time you use that LOC then the next property has increased to 80% and so on. So after you increase each LOC you then go back to the first one and repeat. – theory anyway. Usually your income won't growth fast enough to keep things usustanable.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of s0805s0805
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    TheFinanceShop wrote:
    Some lenders like Suncorp, St George and Macquarie allows you to easy create sub accounts. 

    If we are talking about a loan amount of $595k  then Westpac will do 4.97% (plus $1,000 cashback), CBA will do 4.95%, Homeside (NAB) will do 4.94%. 

    Second tiers lenders will even go lower but again don't focus on rate – focus on who will give you the most equity.

    If you are with ANZ try doing a modelled val first.

    Shahin, i think even with ANZ breakfree package they allow you to have unlimited loan accounts but ofcourse not unlimited offset accounts…..given cross collaterising is issue i only have option of setup different facilities for each equity release….

    About interest rate….yes i am not gona move for couple of basis points….i think ANZ realizes that and that's why they don't budge on rate….what is modelled val ( i thought they only had 2 types….curb & full)….which lender you found lately been coming higher on MELB valuations….

    Profile photo of s0805s0805
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    Terryw wrote:
    [

    No, it is possible to do all without crossing at any stage. But in the early days cash is tight and equity is tighter, so clients often try to access equity and take out little bits at a time. After a while growth kicks in and you might take one property up to 80% and by the time you use that LOC then the next property has increased to 80% and so on. So after you increase each LOC you then go back to the first one and repeat. – theory anyway. Usually your income won't growth fast enough to keep things usustanable.

    OK….so basically LOC is setup for each equity release in early days……dip in to them early….convert LOC to IO once it is used……then let the time & compounding growth do its magic….it's to hoping that atleast one in your portfolio will have excellent growth then repeast the process….

    Profile photo of Richard TaylorRichard Taylor
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    So805 Anz will allow the funds to be paid back into the loan itself on drawdown without closing the account (I have done it on 2 forum clients loans which settled over Xmas).

    Admittedly they don't like doing it and you might have to tell them a dozen times on settlement but they will do it and the rate will be cheaper than a Equity Manager Line of Credit.

    Cheers

    Yours in Finance

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    Profile photo of Jamie MooreJamie Moore
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    Agree with Richard – there's no point in paying a premium for a LOC product, especially with ANZ, when an IO variable loan will end up having almost identical benefits. I think there might be a minimum redraw of $2k with ANZ (that's off the top of my head though) – but apart from that, it makes sense to save yourself a little on the rate and go IO. I don't think I've ever actually set up a LOC with ANZ for any clients. It's always been IO.

    Cheers

    Jamie

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