Drawing equity for new PPOR

[James_]

Hi,

I am just seeking some advice in regards to loan structuring / finance.

I am at the beginning of the Investment journey, I have previously owned an IP in regional NSW but sold it because it was underperforming.

Currently, my wife and I have a 2 bed, 1 bath, 1 garage villa which is our PPOR. A recent ANZ valuation has it at $630 k , the mortgage is $430 k. So there is currently about $74 of useable equity here (based on only being able tu use 80% LVR). The long-term investment journey for us is important however, at this point in life more importantly is finding a new PPOR where we can raise our young family. Then in the short to medium term hopefully additional equity is raised and we purchase additional IP's.

My question is what is the best way to structure our fincance moving forward. We want to purchase a new PPOR for approximately $750 k, as mentioned above we have $74 k in useable equity and about $40 k saved in our offset account for a deposit. Once we purchase a new PPOR we will turn our current PPOR into IP1 with an interest only loan, I have done the sums and this should be close to cash flow neutral.

Purchase price: $750 k (inclusive of purchase costs)
Deposit: $114k (includes equity and savings)
LMI: Approx 85% - I am willing to accept paying LMI as there is potential for CG in the area, and doesn't LMI start increasing dramatically beyond about 87%

What is the best way to use the equity, is it as a lump sum or line of credit? I know cross-collaterisation is another option but I have read too many negative stories about that option. And, do any banks allow you to have two separate mortgages that are not cross-collaterised or is it best to use two different lenders?

 

[Aaron_C]

Don't do the x-coll as the LMI will go up exponentially as your total loan amount will go beyond $1m.

Best way actually would be to pay LMI on the smaller property and pay less LMI on the bigger one. Loan split on property 1 for the equity released and new loan for new property.

 

[James_]

Just to add to the above detail, I don't think loan approval in terms of servicing the loan would be too much of an issue. My current annual package is about $150 k and my wife's is about $ 80 k. We currently have no dependants and no other personal loans / car loans. Thanks.

 

[James_]

Don't do the x-coll as the LMI will go up exponentially as your total loan amount will go beyond $1m.

Best way actually would be to pay LMI on the smaller property and pay less LMI on the bigger one. Loan split on property 1 for the equity released and new loan for new property.

OK, I didnt think about paying more LMI on smaller property to release more equity. We have actually previously paid LMI on Property to about 86%, if we keep this loan with the same bank does that mean we could potentially take the LVR back up to the same amount at 86%, ant not have to pay LMI again because we previously have?

On your loan split comment, so the one mortgage is actually split to provide two different purposes? I don't think I properly understand the loan split idea?

Thanks for your comments mate.

 

[Aaron_C]

Yes if you already paid LMI you will get a credit for the new increase.

You just create a new loan on top of the existing ANZ one.

 

[James_]

Thanks again Aaron.

Mate, I am looking to set this up and get pre-approval so that we are prepared. I noticed you're based in Melbourne, do you recommend any good brokers in Sydney?
Thanks.

 

[Rolf Latham]

Once we purchase a new PPOR we will turn our current PPOR into IP1 with an interest only loan,

I would be looking to do the IO thing NOW, or yesterday actually, since the more remnant debt you have the better for your quite highish marginal tax rates.

As an aside, further streamlining could involve looking at a part spousal transfer while still PPOR, to allow for some partial regearing

Once you acquire that shiny new non-dedutible debt, look at setting up a debt recycle facility with a decent financial planner if that suits your head space and risk profile, and make sure you choose a loan product that allows same.

A further question...... is the 430 loan "untouched" in terms of redraw or salary crediting ?

As for Sydney based brokers, Terry W knows his stuff, and Jamie is on the sydney outskirts . Both post here regularly.



ta

rolf

 

[Jamie M]

Hiya James

As Rolf mentioned - I'd covert the current loan to interest only and carry out an equity release at the same time.

That release will cover off the deposit/costs on the next purchase and would be set up as a second loan split.

Some number crunching would need to occur on what will limit the LMI costs here - whether to borrow more against the current property and less against the new one, or vice versa.

If you paid LMI on the current property previously - then it's probably going to be beneficial to increase this loan above 80% and cop some LMI (albeit a smallish adjustment to the fee you previously paid) and reduce the LVR on the new purchase.

Cheers

Jamie

 

[Marty McDonald]

Hi James,

As you paid LMI previously you can't change the existing loan to IO with ANZ without redoing an application but why not do everything in one go..

Application1) Convert existing loan to IO and separate loan for cash out to use as deposit on new PPR. This can be tweaked to find the to optimal level probably 88% + LMI or 85% + LMI
Application 2) new application for pre approval.

Don't mean to spruik but I am also in Sydney (north side if that's any good).

 

[Rolf Latham]

Don't mean to spruik but I am also in Sydney (north side if that's any good).

forgot about you.

you have been so quiet of late

ta
rolf

 

[Redom]

Thanks again Aaron.

Mate, I am looking to set this up and get pre-approval so that we are prepared. I noticed you're based in Melbourne, do you recommend any good brokers in Sydney?
Thanks.

Hey James - others have already hit the nail on the head - particularly with the ANZ LMI re-credit.

Pre-approval is a good idea - a broker should be able to set up for you pretty quickly.

MickC, Shahin, Marty and Jamie are some of finance guns located around Sydney.

Given your situation, any of those will be more than capable of assisting. You could go to brokers outside Sydney too - most of its done electronically nowadays.

 

[Terry_w]

I just advised 2 clients today on a similar situation. There are a lot of people out there with equity in an investment property or a PPOR soon to become an investment property and there are a few strategies to assist with the deductibility of interest as well as the loan structure.

It seems not many tax advisers know about deductibility of interest.