Borrowing and Financing Strategy

[Ports]

Greetings all,

Long time listener first time caller....

Question regarding our situation and what strategy we should go for?

Wife and I want ot buy PPOR shortly. Details are:

IP approx $100 - $120K equity, earns $1000 pm rent

I gross $85k Wife grosses $78k.

$80k savings.

No kids (yet), no loans, 800 pm Rent.

Looking at propertys up to $650,000.

What are thoughts on borrowing power and also financing structure? I know we have been pre-approved a few years ago but have no idea what loan product it was...

Many thanks.

 

[Electro]

Based on the figures you've provided I believe $650k should be no problem. If you are serious about it, I would suggest you get a mortgage broker to run through the figures and strategies with you.

There are a few good brokers on here which I'm sure some will recommend here

 

[Rolf Latham]

Hi

Welcome

technically 650 is doable, but what can YOU afford to pay each week ?

Id want to make sure alos u have the right structure in place so u can maximise your current equity.

Product per se is probably less of an issue than structure

ta

rolf

 

[jrc77]

Greetings all,

Long time listener first time caller....

Question regarding our situation and what strategy we should go for?

Wife and I want ot buy PPOR shortly. Details are:

IP approx $100 - $120K equity, earns $1000 pm rent

I gross $85k Wife grosses $78k.

$80k savings.

No kids (yet), no loans, 800 pm Rent.

Looking at propertys up to $650,000.

What are thoughts on borrowing power and also financing structure? I know we have been pre-approved a few years ago but have no idea what loan product it was...

Many thanks.

Ports,

If there is any *possibility* in the future that you want to buy another PPOR and keep this first place as a IP, make sure you understand the tax consequences of offset accounts vs redraw accounts and contaminated loans.

Regards,

Jason

 

[Ports]

Thanks Guys.

Yes structure is what I am trying to get my head around.

If it does help just heard back from agent - IP is now valued approx $270,000 and owes $112,000, so more equity than I first thought.

Affordibility is a massive concern of mine - we are definitely not wanting to get in over our heads. Up to $800 per week should be serviceable.While not wanting to end up in poverty we want to get into area of Sydney that is near train lines for long term growth plus sanity from not being stuck in traffic!

One idea I heard was to go for an interest only product and pay as if P&I and then if/when kids come along can fall back to interest only.

Thanks

 

[alexlee]

If it does help just heard back from agent - IP is now valued approx $270,000 and owes $112,000, so more equity than I first thought.

The equity increases the total amount you can borrow, but it doesn't increase how much you can afford to repay.

Affordibility is a massive concern of mine - we are definitely not wanting to get in over our heads. Up to $800 per week should be serviceable.While not wanting to end up in poverty we want to get into area of Sydney that is near train lines for long term growth plus sanity from not being stuck in traffic!

One idea I heard was to go for an interest only product and pay as if P&I and then if/when kids come along can fall back to interest only.

You'd be very close to your line as it is. 650k property, 90% loan @ 7% would be 41,000 a year interest only. P&I would increase the payments by maybe 12k a year, which goes over your budget. That plus if you are close to wanting to have kids, it's very, very tight.

 

[Ports]

Please excuse my ignorance, I am in finance but usually involving a single asset (Car...).

Agree with Alexlee thoughts - it is getting tight @ 90% LVR, however, I thought that the equity + savings would have meant a much lesser amount.

Rough calc as I remember someone showing me previously:

New Prop: 650,000
I.P. val : 270,000
@80% : 736,000
I.P. loan: -112.000
Tot lending: 624,000
The diff between this Tot and property cost needs to be filled with LMI or cash.
Question is, is this total lending amount the Total capital amount owed to the bank for the two properties?
Also, where does the 60k left over savings go?
Thanks guys, really appreciate the help!

 

[Rolf Latham]

Hi Ports

this is what I would loosely suggest if u were my client with this limited info

Refi the 112 on the IP to IO if not that already IO, secured ONLY to the IP

Place a separate loan on the IP of 104 000 secured ONLY to the IP, use the majority of this for the deposit and costs for the new place.

Then I would draw a 90 % lend on the new purchase at 650 k = 585 000 interest only with offset

Place your left over savings into the offset thats linked to the new 585 home loan.

There are ways to make this more tax efficient and reduce notional repayments using some debt recycle methods( which would then need a diff loan structure)

Please go and have a chat to an independent broker to get an idea of the various options you have. There is a lot of soft data and fuzzy stuff that cant be drawn from you on a public forum the may have a significant impact on any structure.

I would have concerns about your affordability so one would also need to look to mitigate rate and other potential risks


ta

rolf

 

[Marty McDonald]

I know it maybe sacralidge to say this on this forum but if affordability is your main concern you could look to offload the IP.

$270,000 sale price
- $112,00 mortgage
- $8000 agent costs and legals
= $150,000 gross proceeds
- cgt?
= net proceeds
really rough guess say $112,000

then...

$650,000 purchase
+ $35,000 costs
- $112,000 proceeds
- $60,000 savings ($20k for slush fund)
= $513,000 loan required
= 79% LVR

Just a thought. Off course no one ever accumulated wealth long term by selling assets either.

 

[Rolf Latham]

I know it maybe sacralidge to say this on this forum but if affordability is your main concern you could look to offload the IP.

sometimes that can be a sensible strategy

ta

tolf

 

[Ports]

Hi Guys,

Yes, Marty and Rolf it was a strategy that I had considered, and am interested to see that it is not that crazy!

It would mitigate a lot of risk, but as the IP is in Gladstone and on the cusp of some pretty hefty investment in the area it might be hard to let it go.

Rolf, I understand your suggestion and it makes sense – the other ‘calculation’ previously shown to me would be x-coll?

Thanks for your help!

 

[Rolf Latham]

Rolf, I understand your suggestion and it makes sense – the other ‘calculation’ previously shown to me would be x-coll?

Yes ports, but thats probably not the real issue.

Although at this point your question relates more to affordability and will I find a lender, there is more to what you want to achieve than the average bankie or laptop broker can do without some input also from an accountant

You could use xcoll succesfully and to ur advantage if for eg you were to do a spousal sale of the IP ( assuming its currently owned 50/50) and thus get your deductible debt up from day one.

You may have quite a few options ( just to confuse u further)

Too often I find people choose to do what is convenient and obvious vs what is "right" and takes a bit of footwork and moving out of ones comfort zone. I suppose thats why you are here, to find out what is best.

ta
rolf