deposits on IP's



From: Kevin Fielding

Hello all again.
Someone I know who has 4 IP,s advised that I pay off the mortgage on my PPOR first, then borrow for an IP.
This would probably be the ideal, but if I did that I would never be able to start.
So my question this time is - Is it better to borrow the full amount for an IP including the deposit or should you save up the deposit first to reduce the debt.
I have savings that I want to use to improve my existing house instead of paying off the mortgage, and would prefer not to dip into them for deposits.
Some guidance would be much appreciated.

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Reply: 1
From: Manny B

Hi Kevin,

why not do both (buy the IP & renovate your home)... by renovating your home you increase the value of your PPOR, therefore the bank can then re-value it & then use the equity of your PPOR to gain a 100% loan for your IP, it would be pointless waiting to improve your own home & pay it off prior to purchasing an IP, as IP values by then may have doubled in value, leaving you in the rat race much longer...

Good luck with your decision & wish you luck...

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Reply: 2
From: Andrew G


I have two IPs and like you would like to get rid of my mortgage. I chose to buy IPs NOW rather than waiting, even though I hope to have the mortgage gone within 2 years.

Hopefully, you will have enough equity in your current home to be able to borrow the whole amount (plus some extra) for the legals, so you don't fork out a cent initially.

Keep adding to your house if the funds are available, as any increase in value will benefit your borrowing capacity anyhow.

If you purchase the IP now, you can start the ball rolling to your retirement .....

Hope this has helped?
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Reply: 3
From: Rolf Latham

Hi Kevin

You have answered your own question :eek:)

"If you paid off your PPOR youd never be able to start". this is the same position many many people find themselves in.

Many a finance professional (eg accountants) have advised my clients NOT to borrow for Ips until they had paid off their PPOR AND saved a cash deposit of 20 % and the costs as well.

I live in Sydney in the year 2002 and while that type of advice may hold elsewhere or in previous times I feel it is not safe to take that sort of risk elimination route. That type of totally risk averse planning will mean you will not be safe, rather you will be unsafe and sorry.

PS Just opinion, so please seek specialist advice.


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Reply: 3.1
From: Tom Moschitz

The accountant I use is well established in property himself (always a good sign).

His criteria:

When the interest you are paying on your PPOR is less than the amount you could achieve if you rented it out, it's time to put a IP.

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Reply: 3.1.1
From: Steve Piggott

Hi there, i've had this discussion many times with friends etc and I give them this scenario.
A.Buys 200k house std P&I @6.00% over 25 yrs
B.Buys 200k house int' only @6.00%
10 yrs pass by.
A. has paid off his housed with 2 jobs and a near heart attack and is now freehold with a house worth 400k.
Standing ovation for A.
Well done A.
B. uses interest only mortgages
B.puts aside the principle component and value adds to his home and in yr 2 purchases his 1st IP @ 200k. As with his PPOR he value adds to IP in yr 2 , re'vals and purchases IP no.2.@200k. 6yrs now pass and B. is able to purchase 2 more IP's @200k and in the 2yrs following he purchases 2 more IP's.
The result for B. at yr 10 with approx 7% CG.
PPOR is 200k surplus to mortgage.(10yr CG)
IP 1 is 140k surplus.(8yr CG)
IP 2 is 100k surplus.(6yr CG)
IP's 3&4 are jointly 120k surplus.(4yr CG)
IP's 5&6 are jointly 58k surplus.(2yr CG)
Total equity is nearly 620k and will increase to over 900k in the next 2 yrs.
Equity will continue to increase to over 1.4 million @ yr 15.
B. did this without paying a single dollar off his mortgage principle.
Even at yr 10 he could draw equity down tax free at 7% of his equity and have 40+k pa.
At yr 15 its 100k pa and his equity still grows.
AAAhhh the power of compounding and leverage.

Hope this stops you wasting your money and donating more of your cash to the banks.

The Banks ideal:get as much as possible,as often as possible,for as long as possible.

The investors ideal:pay as little as possible as often as you must for as long as you need.

Happy Investing... Neb :)
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