Forums / Getting Technical / Finance / Use all available equity or take new loan

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  • Profile photo of Sark0605Sark0605
    Participant
    @sark0605
    Join Date: 2016
    Post Count: 6

    Hi guys
    I was wondering which is a better option. I have two IPS which have equity around 200K. I can service only one more loan of 600K. Should i use all of my equity and borrow the remaining 400K from new loan or should I just get the 10% equity and borrow remaining 540K from new loan.

    In the long run which would be a better option

    Ta

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    The second option would likely involve paying LMI. No point in paying this if your serviceability will run out before your equity.
    .

    If serviceability later improves you can always borrow against these properties further and incur lmi then if need be.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,325

    Hi Sark,

    I was wondering which is a better option. I have two IPS which have equity around 200K. I can service only one more loan of 600K. Should i use all of my equity and borrow the remaining 400K from new loan or should I just get the 10% equity and borrow remaining 540K from new loan.

    In the long run which would be a better option

    Since you are talking about “using all of your equity” vs “using just 10% equity”, it strikes me that you are to be borrowing the same total amount anyway.

    Am I right? If so, then (like Terryw) I see no sense in you paying LMI unnecessarily.

    If I am not right, then please add some more words around your meaning of “using all of your equity” – e.g. do you already have an Equity loan in place that we don’t know about (???) so, to you, it seems like you are using “cash” rather than borrowing more.

    Benny

    Profile photo of Sark0605Sark0605
    Participant
    @sark0605
    Join Date: 2016
    Post Count: 6

    Yes thats right …i put the wrong percentage in .apologies..eg
    IP 1 : equity available 100K
    IP 2 : equity available 80K
    new IP 3 : PP is 500K
    Serviceability is 500K

    Options without LMI
    1. New loan 80% and 20% equity from IP 1..both LVRs for IP1 and IP3 will be 80%
    2. Access all available equity (180K) from IP 1 and IP 2 and borrow remaining from new loan (320K). LVR for both IP 1 and IP2 80% and IP3 LVR 64%

    Total borrowing will still be 500K and I wont pay LMI with both options. In that case which option above is better and why ?

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,325

    Hi Sark,

    Thanks for the clarification. From these extra words then, a few more questions spring :-

    1. You seem to understand that the Equity in IP1 and 2 must be “available” – although you don’t include figures to demonstrate this, your comments re “LVR for both IP1 and IP2 will be 80%” gives me the impression you have this covered. So, “check!”

    2. I can’t think of anything substantially different in doing it one way over the other – but I am not a Mortgage Broker – could there be some extra “value adds” that one of those venerable people might be able to add here (consider next point, and options it might provide…)

    3. You don’t mention lenders – could it be that you might look at mortgaging the new IP with a totally different lender? If so, that might lead to benefits that you perhaps haven’t even considered (e.g. not all eggs in one basket, better rates or lending rules, easier future loans from a different lender, etc). And there you are getting right into the sweet spot of the Terryw’s of this world !! MB’s know this stuff backwards,

    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    I am not sure what you are asking but if you mean out down a 10% deposit by borrowing against other property then lmi will apply in most cases.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Sark0605Sark0605
    Participant
    @sark0605
    Join Date: 2016
    Post Count: 6

    I will not be paying any LMI since i am not borrowing more than 80% anywhere thanks to equity.

    Anyways i think option 2 is better since i am taking advantage of available equity now. It might go down in a couple of years and I wont have access to it. It also keeps the LVR down on new property for new bank since it will use IP3 as security.

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Generally speaking, I would probably borrow 80% on all properties and place remaining funds in offset (or redraw). Be sure not to cross the loans! Suggest considering speaking with a broker for specific advice 👍😎

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
    Email Me | Phone Me

    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Draw out all available to 80% LVR and then store the funds so nil interest charge until used.

    Then for the subsequent purchase purchase at whatever the most appropriate LVR (80%, 88%+LMI) etc and then you’re set.

    It’s best to draw out the equity while you can, as serviceability decreases with each purchase you may otherwise find yourself with equity you cannot draw out and then you’re stuck.

    Likewise lender regulatory risk is a real thing with the significant policy changes ever coming through. We’ve seen a number of lenders reduce their IO terms available and LVR’s which interest only can be taken – so it would be best to get this sorted ASAP whilst you can.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of annpannp
    Participant
    @annp
    Join Date: 2004
    Post Count: 13

    Hi Sark,
    I agree with Ethan and Corey. If you take the 80% loan on IP3 then you will have access to the surplus funds (equity) of $80K for your next investment when needed. An offset account holding the surplus funds linked to the new loan will keep your paperwork neat, alternatively, you don’t have to draw down on the full loan. Have you remembered to factor in your purchase costs such as stamp duty, bank fees and conveyancing? It’s roughly around 5% of purchase price.
    Good luck,
    Ann

    Profile photo of Jacqui MiddletonJacqui Middleton
    Participant
    @jacm
    Join Date: 2009
    Post Count: 2,539

    Normally people would access enough money from equity release to fund a 20% deposit, stamp duty and buying costs on a new investment property purchase. The balance (80% of purchase price) would come from a new and separate loan.

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

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