1st Investment Property Loan

[BlkNite]

Hi guys,

Just stumbled across this forum and what a good place this is. I need some help\advise with following scenario ;

We will complete 6 years in our residential property and with family growing we have decided to jump in mkt and buy a new one and rent this one out.

I will be getting around $40,000 equity from refinancing this property which I can use to buy a new one. We are targeting not to borrow more than 480,000 in next one ( incl all govt fees , LMI etc).

My broker suggested me to try Bankwest for pre-approval . With Bankwest , I noticed that my LVR on new loan would come around 97% with LMI approx $16000 (thru QBE ).

I also checked Genworth LMI calculator , it says LVR to be 89% and LMO cost to be $8,500.

1. 1stly I want to know why such a big diff between 2 ? Am I doing missing something or doing something wrong ?

2. Any suggestions banks \ financial institutions who I can look into for my 2 loans i.e. 1 refinancing my current loan , 2 New home loan.


Thanks in adv.

 

[Corey Batt]

I think you're factoring govt fee's as being leveraged -that's not how it works.

Stamp duty and the like is first paid out from your 40k, then the leftover funds used are used as a deposit - hence why the high LVR.

They would have suggested Bankwest because one of their niches is HIGH LVR loans - one of the only reasons to use them IMHO.

What LVR are you taking the original PPOR up to by taking out the 40k?

 

[Shahin_Afarin]

1. Don't pay principle and interest on the current loan if you plan to convert the existing property into an IP. You are simply reducing the tax deductibility.

2. Ensure that the properties are not crossed securitised. Ensure that the equity release is a separate loan split so you are not contaminating the tax deductibility of each of the splits.

3. I would really question why Bankwest has been presented to you as a suitable lender. They have very conservative borrowing capacity and you are paying a high LMI. This means that you may not be able to re-use the LMI credit down the track due to their incredibly conservative borrowing capacity.

Did you pay LMI on the existing loan? Where is the existing loan?

 

[BlkNite]

I think you're factoring govt fee's as being leveraged -that's not how it works.

Stamp duty and the like is first paid out from your 40k, then the leftover funds used are used as a deposit - hence why the high LVR.

Thanks Cotey, I did not thought of this.

What LVR are you taking the original PPOR up to by taking out the 40k?

- I think it was 91% LVR

1. Don't pay principle and interest on the current loan if you plan to convert the existing property into an IP. You are simply reducing the tax deductibility.

2. Ensure that the properties are not crossed securitised. Ensure that the equity release is a separate loan split so you are not contaminating the tax deductibility of each of the splits.

3. I would really question why Bankwest has been presented to you as a suitable lender. They have very conservative borrowing capacity and you are paying a high LMI. This means that you may not be able to re-use the LMI credit down the track due to their incredibly conservative borrowing capacity.

Did you pay LMI on the existing loan? Where is the existing loan?

Thanks Shahin .

1. I will keep that in mind.
2. Pardon my lack of knowledge , what do you mean by that in simple terms ?
3. Yes , I did paid LMI when we got it . Its with CBA.

 

[Redom]

What LVR are you taking the original PPOR up to by taking out the 40k?

LMI premiums skyrocket as you the LVR increases past 90%. Think of it as an exponential curve, the rate of increase from 80-85% LVR is small, whereas the rate of increase from 90-95% is very high. Hence the really big premium.

One way to get around it could be to increase the equity release component. As Corey mentioned, this will depend on the LVR that you're already taking it up to. If possible, you'd save yourself a fair bit of LMI by borrowing upto 88% on your existing PPOR and down to 88% on your new PPOR.

As Corey mentioned, Bankwest likely to be recommended given your LVR. They allow capitalisation of LMI beyond 95%, which many lenders don't.

If you adopt the strategy above, then you wont need a high LVR loan and i'd recommend going to a different lender if possible (for Shahins reasons, as well as Bankwest not being the ideal place to do your banking with).

Cheers,
Redom

 

[Corey Batt]

Cross collateralisation means they tie up multiple loans to the debts, meaning there is more than one property providing security to a loan. Considering your current PPOR is with CBA and proposed finance is with BankWest, this doesn't sound to be the case (cross coll for the most part would require the same lender).

Still something to remember moving forward, you should never have a loan with more than one security attached to it.

 

[Jamie M]

I will be getting around $40,000 equity from refinancing this property which I can use to buy a new one. We are targeting not to borrow more than 480,000 in next one ( incl all govt fees , LMI etc).

Hiya

A couple of questions.

1. How are you calculating equity? What is your current loan amount and property value?

2. Which lender are you currently with?

3. Did you ever pay LMI on your current loan?

Cheers

Jamie

 

[Shahin_Afarin]

Thanks Cotey, I did not thought of this.
- I think it was 91% LVR




Thanks Shahin .

1. I will keep that in mind.
2. Pardon my lack of knowledge , what do you mean by that in simple terms ?
3. Yes , I did paid LMI when we got it . Its with CBA.

In that case its unlikely to be beneficial for you to refinance the existing loan across to any lender so be careful of any broker or banker recommending you to do this (it only benefits them because they get paid for it).

1. What is the value of the existing property?
2. What is the loan against it?

Once I have the above I will show what I mean about the structuring it correctly.

 

[BlkNite]

Hiya

A couple of questions.

1. How are you calculating equity? What is your current loan amount and property value?

2. Which lender are you currently with?

3. Did you ever pay LMI on your current loan?

Cheers

Jamie

Hi Jamie ,

1. Equity - Approx sale price in mkt atm , Current loan amt - $315,000 , Property value - $400,000

2. CBA

3. Yes , I did when got the loan 6 years ago.

 

[BlkNite]

In that case its unlikely to be beneficial for you to refinance the existing loan across to any lender so be careful of any broker or banker recommending you to do this (it only benefits them because they get paid for it).

1. What is the value of the existing property?
2. What is the loan against it?

Once I have the above I will show what I mean about the structuring it correctly.

1. What is the value of the existing property? $400,000
2. What is the loan against it? $315,000

 

[Shahin_Afarin]

1. What is the value of the existing property? $400,000
2. What is the loan against it? $315,000

Ok this is how it should be structured:

Loans against the existing property:

Loan 1: $315,000 (interest only)
Loan 2: $37,000 (equity release up to 88% LVR) plus LMI capped or $45,000 (equity release up to 90% LVR)

Loans against new property:

Loan 1: $460,000 (approximately depending on whether you are doing 95% or 97%)

You will need approximately $46,000 for the new purchase if its at $480,000 purchase price.

Also you need to advise the broker or banker not to cross securitise the application. Even with the above structure they can submit just the one app and cross them. They will need to submit 2 applications.

 

[Jamie M]

Hi Jamie ,

1. Equity - Approx sale price in mkt atm , Current loan amt - $315,000 , Property value - $400,000

2. CBA

3. Yes , I did when got the loan 6 years ago.

OK - top up CBA loan to 90% (or 88%) and make sure they credit you the LMI you've already paid. This loan needs to be set up as a second loan.

Seems like you need an IP loan that will be above 95% once LMI is capitalised - hence the reason your broker has suggested BWA. Westpac can be another good option (they'll want to see that you hold 10% equity in your current home and will likely order a desktop val to confirm).

Cheers

Jamie

 

[BlkNite]

Ok this is how it should be structured:

Loans against the existing property:

Loan 1: $315,000 (interest only)
Loan 2: $37,000 (equity release up to 88% LVR) plus LMI capped or $45,000 (equity release up to 90% LVR)

Loans against new property:

Loan 1: $460,000 (approximately depending on whether you are doing 95% or 97%)

You will need approximately $46,000 for the new purchase if its at $480,000 purchase price.

Also you need to advise the broker or banker not to cross securitise the application. Even with the above structure they can submit just the one app and cross them. They will need to submit 2 applications.

That's the thing , I don't have any cash sitting with me for new property.

 

[Shahin_Afarin]

So you will need to do 90% equity release on the existing property instead of 88%.

You need to order a valuation on the existing property ASAP and draw upon that equity so you at least know that the funds for the deposit are ready to go.

Its definitely something that you do not want to leave to the last minute.

 

[BlkNite]

So you will need to do 90% equity release on the existing property instead of 88%.

You need to order a valuation on the existing property ASAP and draw upon that equity so you at least know that the funds for the deposit are ready to go.

Its definitely something that you do not want to leave to the last minute.

Thanks Shahin and Jamie . Make sense what you guys are saying , Broker has already requested BW to do a valuation so I am expecting this to happen in next 2-3 days.

 

[BlkNite]

OK - top up CBA loan to 90% (or 88%) and make sure they credit you the LMI you've already paid. This loan needs to be set up as a second loan.

Seems like you need an IP loan that will be above 95% once LMI is capitalised - hence the reason your broker has suggested BWA. Westpac can be another good option (they'll want to see that you hold 10% equity in your current home and will likely order a desktop val to confirm).

Cheers

Jamie

Just curious Jamie , Why to have top up loan as 2nd loan with CBA , why not top up existing one ?

 

[Shahin_Afarin]

Thanks Shahin and Jamie . Make sense what you guys are saying , Broker has already requested BW to do a valuation so I am expecting this to happen in next 2-3 days.

You mean CBA right or is he recommending that you refinance the existing loan across to BW?

 

[Corey Batt]

Just curious Jamie , Why to have top up loan as 2nd loan with CBA , why not top up existing one ?

You will be mixing deductible and non deductible debt if you have it as one loan, which is a bad idea for tax purposes. 40k being released is for non investment use so isn't tax deductible, whereas the original loan will be when it becomes an investment property.

Keep the loans separate, to save yourself tax issues moving forward.

 

[BlkNite]

You mean CBA right or is he recommending that you refinance the existing loan across to BW?

Yes , Broker is suggesting to get both loans from BW.

 

[Jamie M]

Just curious Jamie , Why to have top up loan as 2nd loan with CBA , why not top up existing one ?

To split up deductible and non-deductible debt.

Best to stick with CBA for the equity release since you've already paid LMI (so the LMI on the equity release should only be an adjustment fee).

Cheers

Jamie