Providing you meet the usual DSR & LVR requirements you can increase an LOC's credit limit.
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Accessing PPOR equity to invest in IP: Top Up or Line Of Credit
- Thread starter Evgen
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Providing you meet the usual DSR & LVR requirements you can increase an LOC's credit limit.
In all my experience discussing friend and family mortgages I am yet to see a single person who has come out in front with fixing a loan. Not one single time has someone said to me they have benefited from fixing the loan. Maybe they can try and argue they slept a little easier but even then I doubt that giving never ending talks of economy failure and dropping rates.
I can tell you what I have seen though. I have seen friends fixed whilst interest rates tumble and either pay huge break fees or high interest whilst everyone else enjoys low rates. I have seen friends become stuck because they need equity or want to sell but the banks throw on top huge break fees.
For the brokers on this forum who have seen thousands of loans. In all your experiences, what percentage could you say have come out in front with fixing a loan?
I can tell you what I have seen though. I have seen friends fixed whilst interest rates tumble and either pay huge break fees or high interest whilst everyone else enjoys low rates. I have seen friends become stuck because they need equity or want to sell but the banks throw on top huge break fees.
For the brokers on this forum who have seen thousands of loans. In all your experiences, what percentage could you say have come out in front with fixing a loan?
Depends what your definition of "in front" is. Sometimes it's not about the money.
I don't fix rates for cash flow reasons, rather risk minimisation.
Sure, if rates go up up I'm ahead cash flow wise but more importantly to me it provides SANF knowing I'm insulated from any potential economic fluctuation.
If the rates go down the cash flow difference then becomes my insurance premium for the SANF.
Everyone is different. No right or wrong way. Just different ways based around one's portfolio size, from which we can structure the best option for our own individual financial positions, time frames & goals.
I hope this helps.
Hi albanga
Just an example but..
I recall a number on SS jumping onto the WBC 4.99% for 3 years when it became available in 2008 (albeit for a very short window) and those investors would have benefited over the ensuing years
exits to find thread.....
Yes, I fixed at that rate in 2009 for 3 years on half the portfolio.
After it rolled out, we refixed the same loans for another 3 years @ 5.59%, soon to roll out again next year.
Sure its a slightly higher rate (which was a discounted prevailing rate at the time) but when one's built a substantial size portfolio, sometimes it's not all about the money, rather about minimising one's risk exposure along the way .
That is probably be cause rates have been dropping for the past 4 or 5 yeas.
Generally yes.....
sorry all my comments were not an argument, it is purely my observation.
And yes I totally understand the security behind fixing loans but I still reckon 90% of people who lock in for security and watch another rate drop, kick themselves.
I am genuinely curious though from broker experience what rough percentage of clients have benefited Financially from fixing rates? I imagine over the past 5 years only a few but still interested to know over a longer period.
And yes I totally understand the security behind fixing loans but I still reckon 90% of people who lock in for security and watch another rate drop, kick themselves.
I am genuinely curious though from broker experience what rough percentage of clients have benefited Financially from fixing rates? I imagine over the past 5 years only a few but still interested to know over a longer period.
Thanks everyone. Very helpful.
The other thing I'm thinking about is when to setup LOC.
I'll probably need the LOC funds mid next year. However, there have been recently good sales in my suburb (Sydney south west) and I think now would be a good time to setup LOC as valuation may be pretty good. On the other hand, I recon the market is still going up a bit so that it may make sense to wait half a year and then establish LOC.
Theoretical question guys. Say I setup LOC for $100000 now. Then, the next half a year the market drop substantially so that if I were to do it half a year later the bank would only be willing to setup LOC for $50000. If it's already established for $100000 could the bank come back to me and say they want their $50000 back?
The other thing I'm thinking about is when to setup LOC.
I'll probably need the LOC funds mid next year. However, there have been recently good sales in my suburb (Sydney south west) and I think now would be a good time to setup LOC as valuation may be pretty good. On the other hand, I recon the market is still going up a bit so that it may make sense to wait half a year and then establish LOC.
Theoretical question guys. Say I setup LOC for $100000 now. Then, the next half a year the market drop substantially so that if I were to do it half a year later the bank would only be willing to setup LOC for $50000. If it's already established for $100000 could the bank come back to me and say they want their $50000 back?
I can't think of any of my clients who have benefitted financially - but many who had locked in rates only to watch them drop.
However many are the worrying type and locking in a rate has benefitted them in other ways - sleep at night factor.
Thanks Terry and I do appreciate the security with fixed which is why you would do it.
I still think those same people who fixed to sleep at night because the thought of an extra $50 a week with a rate increase have had a lot more sleepless nights watching rate drops. Yes people can argue that there amount doesn't change but if someone is not sleeping due to rate increases then I can almost guarantee they are not sleeping when they see it drop and what that extra .x rate drop would mean to their Cashflow.
I still think those same people who fixed to sleep at night because the thought of an extra $50 a week with a rate increase have had a lot more sleepless nights watching rate drops. Yes people can argue that there amount doesn't change but if someone is not sleeping due to rate increases then I can almost guarantee they are not sleeping when they see it drop and what that extra .x rate drop would mean to their Cashflow.
Sound's like you maybe one of those people who possibly could not sleep?
What happens after some one fixes a rate in material. I can almost guarantee why they fixed would not have changed.
The only variable thing that would have changed is their thinking.
If they're not sleeping, its because they're inexperienced glass half empty type thinkers. ......and as we all know focusing on what one hasn't got, guess what they will get a whole lot more of.
The experienced investors (of any asset class) know investment is all about maximising cash flow and minimising risks.
As mentioned previously, fixing rates is just one of many tools available for minimising risks and applied in this context, used to insulate ones self from both present and future ecomomic climate/conditions that may prevail.
Success is 80% Mindset x 20% Strategy.
In other words, How you think is four times more important than How you plan to do it.
Food for thought.
First a disclaimer, I'm not an accountant, lawyer, banker or broker - basically I can only relate my personal experience, so take this information with a pinch of salt.
I like you wanted to use equity in PPOR to invest. What I ended up doing is;
Loan 1: PPOR, Variable P&I, 100% offset plus LOC
Intention here is to use the LOC for non-investment stuff
Loan 2: Potential investment, Variable, Interest only for 5 years, bank moved cash to 100% offset effectively meaning no interest charge. The loan account and the offset are discrete (ie I'm using separate accounts to keep tracking easier). No LoC on this, it is a pure offset situation.
Loan 3: As for loan 2
All 3 secured against PPOR, so I had to pay the bank for a valuation (I think it was $50).
The refinancing was pretty painless, I had a good guy handling it for me - but note he was an employee of the bank. No fees as I already have a package with the bank.
In relation to your question on what happens if the bank re values your PPOR? If you use the offset strategy I explain above you shouldn't have an issue - this is because the money is effectively drawn when the offset is established and thus you can do what you want with it - the cash is yours and it is in your bank account.
With a LOC I suspect it comes down to the T&Cs of the loan contract, so while technically your LOC maybe approved for $100,000 the bank may have a clause that states you can't exceed the LVR allowed on the loan. So for example, if the value of the PPOR is $500k and the maximum LVR without LMI is 90%, your outstanding loan balance shouldn't exceed $450k and the bank should factor that into the approval process. If 6 months later your property is revalued down by the bank for some reason (I don't know what would trigger this) - say to $450k, then technically I suspect your maximum outstanding loan balance will be 90% of that - so $405k. You should check the PDS for the loan product to see i) what would trigger a revaluation and ii) if it is valued lower whether the bank can ask for a top up to get the LVR where it needs to be. As I said if you use the offset approach this doesn't apply as the cash is already yours!
Hopefully this helps a bit!
CT
Cosmic Trevor, I see at least 7 issues with your set up.
1. LOC for non investment use is not a good idea. If you ever moved out of the house you would not be able to claim any of the interest on the LOC. Use the cash in the offset account to buy personal stuff
2. PI on house ? not so bad, but if you kept it IO you would have more deductions if you ever moved out
3. Loan 2, not sure what you mean here, but ?bank moved 100% cash to offset? worries me. You mean you borrowed money and parked it in an offset? Not good idea because you could end up with a loan of which the interest is not deductible
4. Offset on a investment ? you are throwing money away if you put money into this offset as you will be reducing tax deductions while paying higher non deductible interest on your home loan.
5. You will also be mixing cash with borrowed money (from 3 above) and this will kill deductibility of interest.
6. All secured on PPOR means they are cross collateralised. This is dangerous and unnecessary
7. Employee of the bank helping you ? or helping the bank.
Hi Terry (or anyone!),
I feel silly, it seems you and others are saying that one can gain access to more money from the bank for IP (LOC or loan) without securing against a PPOR. Can you explain more?
As an example, if 2 years ago I had a $400,000 loan on a PPOR purchased at $500,000, interest only.
Things have changed, and I ask the bank to get (or I get?) the property valued and it is now professionally valued at $550,000, with the loan still $400,000.
I can see that there is $50,000 that is "available" to stay under the magical 80%. There could possibly be even more "available" if one were willing to pay some amount of LMI to go to 90% LMR.
So - the silly question - how does one get access to those funds for an IP without the bank wanting or needing to secure the new money (LOC, loan) against the existing property (ie. cross collateralising)?
Thanks for the feedback Terry and I know this is off the topic from the OP, but responding to your points;
I was advised to pay down loan 1 in order that the repayments be reduced to a level I wanted. With an offset they wouldn't vary the repayments down.
On the other 2 loans that are fully offset at the moment (ie the offset balance completely nets out the loan amount). New loans were created each with an offset account and the borrowed funds are in those offset accounts. Its probably unreasonable to ask for free information - but if we drew down on the offset to invest thereby triggering interest charges what would cause the interest charge to be non-deductible?
Thanks for taking the time to provide feedback Terry, much appreciated.
CT
That is reasonable. Nothing wrong with this.
My main worry with this is that you have borrowed in say 2013, parked in offset and then taken out of the offset in say 2014. There is no direct connection with the borrowing and the investing. However, it appears the ATO have accepted this as ok for at least 1 person.
But make sure you never use the offset for anything other than investing and never put any cash at all in the offset.
I am a tax lawyer so recommend people ways to make sure the interest is deductible. But I am also a mortgage broker so recommend the product side as well and sometimes it is not feasible to get a LOC with particular banks. An IO loan may also work in a similary fashion. Worse case borrowing and parking in the offset is an option - but I warn clients of the risks and let them decide how to proceed.
New value is $550,000. 80% of $550k is $440,000. But you owe $400,000 so there is an extra $40k which you could pull out (subject to servicing). You would set up a new split for $40,000. This is secured by the PPOR.
Purchase the investment property for say $300,000. Borrow 90% or $270,000 against the IP and use the LOC to pay the $30k deposit. IP loan is secured by only 1 property.
No cross collateralising of loans.
