Different ways to unlock capital from a property

[mgs4]

Hi All,

I have a PPOR that has a 25% variable loan, 75% fixed loan. Our property has gone up around 20%-25% and we want to unlock some of the capital to use as a deposit for another property.

The issue we have is the break fee on the fixed loan is considerable, there's 1.5yrs left on the fixed loan. Can we get something of an equity line of credit which has an offset account? Eg our property was bought with 80% LVR and has gone up in value around $100k. Can we get an 80% LVR on the increased value to unlock $80k.

Appreciate all help.

 

[Mick C]

You dont need to break the fix rate to tap the equity....just get your existing bank to take out a separate loan for the equity....so you will end up with 3 loans split with the same bank ---keeping your fixed rate untouched.

Hi All,

I have a PPOR that has a 25% variable loan, 75% fixed loan. Our property has gone up around 20%-25% and we want to unlock some of the capital to use as a deposit for another property.

The issue we have is the break fee on the fixed loan is considerable, there's 1.5yrs left on the fixed loan. Can we get something of an equity line of credit which has an offset account? Eg our property was bought with 80% LVR and has gone up in value around $100k. Can we get an 80% LVR on the increased value to unlock $80k.

Appreciate all help.

 

[Jess Peletier]

As Mick said you can access equity without breaking your fixed rate.

However for the new split, you can't get a LOC with offset, you can have a LOC, OR you can get a normal loan with an offset account. Both are good options, a LOC tends to be more expensive and higher risk In that the bank can call them in, so it just depends on how you like to do things.

 

[mgs4]

As Mick said you can access equity without breaking your fixed rate.

However for the new split, you can't get a LOC with offset, you can have a LOC, OR you can get a normal loan with an offset account. Both are good options, a LOC tends to be more expensive and higher risk In that the bank can call them in, so it just depends on how you like to do things.

Thanks very much for your feedback, so I can just get an additional variable rate loan with an offset account. What is the name for this type of loan? Is having the three loans on the property create any additional complications?

Once the fixed rate loan concludes in 3yrs it would be easiest to move the three loans to one variable loan.

 

[Mick C]

1. It's just a normal variable loan...no special name, but there's a particular "process/steps" tho...which your banker or broker can explain and apply for you.

What ever you do...dont break the fix rate- unless it make financial sense.


2. No complications..i mean you already have 2 loans right what's 3 gonna do...keke...it's common for some investors to have 2-5+ loan split per property.

3.After 3 years...you can combine if you like..or keep it separate...BUT really you should keep the NEW loan separate to he 2 current loans ( so you can combine the 2 current loans when the fix ends) for tax reasons- presuming it's used to buy a diff property etc...

 

[mgs4]

1. It's just a normal variable loan...no special name, but there's a particular "process/steps" tho...which your banker or broker can explain and apply for you.

What ever you do...dont break the fix rate- unless it make financial sense.


2. No complications..i mean you already have 2 loans right what's 3 gonna do...keke...it's common for some investors to have 2-5+ loan split per property.

3.After 3 years...you can combine if you like..or keep it separate...BUT really you should keep the NEW loan separate to he 2 current loans ( so you can combine the 2 current loans when the fix ends) for tax reasons- presuming it's used to buy a diff property etc...

Thanks for the feedback. When the fixed rate loan ends why would it be be better to combine two of the loans and not the third new loan as well?

Cheers.

 

[Terry_w]

Thanks very much for your feedback, so I can just get an additional variable rate loan with an offset account. What is the name for this type of loan? .

variable rate loan with an offset

 

[Mick C]

Thanks for the feedback. When the fixed rate loan ends why would it be be better to combine two of the loans and not the third new loan as well?

Cheers.

1st 2 loans is used for current property...the 3rd loan you might use for a different purpose or property...so best to keep it separate...in case you move into the 2nd property etc... All for tax reasons really- the bank doesn't care what you do- they will do what you tell them to do ( most of the time anyway )

 

[Colin Rice]

You can wack the money back in the new loan available as redraw minus the fees so the bank systems dont close the loan.

@ Mick C, banks doing what you ask them to do, yea right

 

[mgs4]

Thanks very much for the great feedback.

On the additional interesting only variable loan with a linked offset account. We would likely place the funds in an offset account until a property is purchased, thereby not incurring any interest. Once a property is purchased these funds would be used for a deposit and/or settlement. Given the funds are used for an income producing asset, a rental property, the interest incurred would be tax deductible right? I wouldn't have thought the security of the loan, being the PPOR, affects the tax deductibility of the loan?

Also would it typically be easier to get the additional variable loan from the same bank one has the existing loan has, I would think this is also simpler.

Appreciate thoughts and feedback, thanks.

 

[Colin Rice]

Once a property is purchased these funds would be used for a deposit and/or settlement. Given the funds are used for an income producing asset, a rental property, the interest incurred would be tax deductible right? I wouldn't have thought the security of the loan, being the PPOR, affects the tax deductibility of the loan?

Also would it typically be easier to get the additional variable loan from the same bank one has the existing loan has, I would think this is also simpler.

Appreciate thoughts and feedback, thanks.

Security is irrelevant as its the "purpose of funds" that determine deductability.

In theory it will be easier to get the IP loan from your current bank (assuming good conduct) but hard to answer definitively with out knowing your short, medium and long term goals.

 

[mgs4]

Security is irrelevant as its the "purpose of funds" that determine deductability.

In theory it will be easier to get the IP loan from your current bank (assuming good conduct) but hard to answer definitively with out knowing your short, medium and long term goals.

Thanks for the quick response. I thought generally banks get more conservative on LVRs as their existing debt exposure with the customer increases, however does this just really kick in at higher levels say $2m+ in debt. Given this I thought we may have less LVR/income requirements with a different bank.

 

[Rolf Latham]

All this assumes

1. The banks valuer agrees with your estimate
2. Your serviceability is there with the lender
3. And the lender is capable of processing the deal in the time frame you need it.

If the val is real rubbish its hard to move

ta
rolf

 

[Colin Rice]

Depends on which bank you are with and what you want to accomplish in the short, medium and longrer term as well as you specific scenario.

 

[Terry_w]

Once a property is purchased these funds would be used for a deposit and/or settlement. Given the funds are used for an income producing asset, a rental property, the interest incurred would be tax deductible right? I wouldn't have thought the security of the loan, being the PPOR, affects the tax deductibility of the loan?

You have borrowed money to invest into a savings account. Don't assume the interest will be deductible once you move the cash from the savings account.

Security is irrelevant generally.

 

[mgs4]

A related question.

I'm looking at borrowing against increased val for PPOR and a second loan to buy a new IP. I'll likely need to use some existing cash as well to meet 20% deposit. It would obviously be preferable to get a larger second loan rather than use existing cash because it would be preferable to have tax deductible debt against IP than reduce cash offsetting PPOR which is not tax deductible.

I'm not sure of the best way to do this, if I got a larger loan for the second property I might incur LMI, is there anyway I can say borrow against the secured cash in the offset account? Appreciate help with this, I may not have described this that well, happy to provide more information.

 

[Colin Rice]

I'm not sure of the best way to do this, if I got a larger loan for the second property I might incur LMI, is there anyway I can say borrow against the secured cash in the offset account? Appreciate help with this, I may not have described this that well, happy to provide more information.

Pay down some PPOR debt from offset and reborrow to creat tax deductable debt for IP purchase.

 

[mgs4]

Pay down some PPOR debt from offset and reborrow to creat tax deductable debt for IP purchase.

Thanks how does this work, PPOR debt is already reduced/offset through funds in offset account. Could you explain how the mechanics work?

 

[Terry_w]

is there anyway I can say borrow against the secured cash in the offset account? Appreciate help with this, I may not have described this that well, happy to provide more information.

It is not secured cash, but a cash deposit at call so cash in an offset could not be used as security - you can take it out anytime.

Take your cash, deposit into the home loan and then set up a new split, LOC, to use for investments.

 

[Colin Rice]

Thanks how does this work, PPOR debt is already reduced/offset through funds in offset account. Could you explain how the mechanics work?

Example:

Property value 500k.

Mortgage Is 400k or 80% LVR with 200k in offset.

Reduce 400k mortgage by 100k from offset reducing PPOR debt to 300k.

Reborrow the 100k in a seperate loan split/LOC and use for deposit plus costs for IP purchase.

Debt is the same over PPOR but the structure is changed to create 100k tax deductable debt if used for investment purposes.