Equity is running low. Any ideas if we can still borrow more?

[Ell]

Hi All,

I must say thanks to you all for providing such a good guidance on IP issues.
I can finally see that there are others who have the same battles as us.
The basic Q that I have without going into too much $$ detail is, we already have own home and IP, both of them are highly geared.
Hubby and I work full time and even with our one IP still have a lot more room for further negative gearing and would love to keep on investing further.
Unfortunately, we have just bought and renovated our house and have not much equity left to play with. Westpac (is who we are with) only let you borrow 80%, as some of you will know.
Q n2 Do we move to another lender who will lend us 95%?
It all a bit risky to be very highly mortgaged.
Any ideas?

PS In Jan's book one of the people she met was able to convince the bank to include the tax savings on the negative gearing into the overall calculation.
Has anyone of you been able to ever do the same?

 

[Merovingian]

Are you able to get your property re-valued? Depending on your circumstances, you may have some equity there due to the renovations, but don't count on it.

Even if you did re-value and release the equity left in your houses, would you have enough to form a deposit on another IP?
Also, you should be able to gear to 90% or similar, but this would come at an added risk for the lender, who would require you to pay mortgage insurance which is a situation many find bad. Your serviceability takes a hit — thus bringing you closer to both the equity and serviceability brick walls. BAD news.

You could try low-doc and no-doc loans, but I don't know anything about them personally so others here may be able to elaborate on that point...

If you are finding it difficult to gear further, it may be a sign saying you're not meant to gear further for the time being. In which case, sit back and let time do its work.

This is definitely not financial advice — just some of my thoughts...

Thanks.

 

[WillG]

Hi Ell,

Without further details it is difficult to propose ways you can keep on investing.

Have you hit a serviceability limit with the banks ?

What do you intend investing in ?. $200k, $500k, $800k properties ?

Can you explain in 'a lot more room for further negative gearing' ?

 

[Ell]

Fair question.

I was hopping to make future investment around 100-200K.
Possibly less, need to find how to find cheap properies.

We just had our renovated house revalued and did a small top up to pay off for the reno.
So, that's why there is not much equity left.
May be a good idea would be to ssave at least 20-30K for the deposit for the next IP.

Just pitty to see all these tax going to waist without additional IP.

I was always wondering at what point does the Bank becames your friend and will lend you the moneys with no problems.
Everytime we deal with our Home finance manager, she then have to take it further to another department and then to the mortgage centre. The whole process takes a very long time. We a both working full time and have no kids, but the bank's reply certainly have surprised us couple of times.

 

[luckyone]

I don't understand why Westpac won't lend you 95%. Are you saying this is a rule? I borrowed 90% on our first and second places with mortgage insurance and they would have gone to 95% if we needed that extra money.

 

[Rolf Latham]

Hiya

Hard to say.

95 % refi top up is possible if your serviceability is ok.

Like the others, please provide some more numbers please, so we can get a better idea.

Might also pay very well to chat or sit with a good independent mortgage broker.

Ta

rolf

 

[Ell]

Hi All,

Rolf, you are right, I guess we don't want to pay mortgage insurance.
I just don't believe in giving away 10K or about that.

I was told by various people that Westpac provides the best serviceability.
I am still yet to grasp that concept well.

If say we have saved some deposit moneys, would the bank then let us borrow the rest? As it is if we combine our IP and home at 80% we will only have 10K to play with. It is so frustrating, I am yet to find out how are the others do it?
I mean how do you purchase one after next after next.
Is it in the time, i.e. have to wait until your properties goes up in value, or have to keep on saving?

 

[duncan_m]

Hi All,

Rolf, you are right, I guess we don't want to pay mortgage insurance.
I just don't believe in giving away 10K or about that.

Dont be too quick NOT to pay Mortgage Insurance. Early on when I started buying property I thought the same thing.. It cost me not having another house or 3 under my belt and has (in hindsight) cost me $100K's.

If I was in your position and a good deal presented itself and I was happy with the upside, I wouldnt hesitate to use Mortgage Insurance to get into it.

 

[Rolf Latham]

Hiya

The COST of mortgage insurance is simply a cost of doing business. You dont have to pay it but then you will have to save up 20 % of the IP plus costs out of tax paid dollars.

The LMI cost is puny compared to the opportunity cost, and having spent your own tax paid dollars rather than placing that against your ppor debt.

LMI is also depreciable over 5 years or over the life of the loan, whichever is the lesser.

Youd have a hard time convincing me that LMI isnt a worthwhile option for you to get into your next place, because if it isnt then the investment cant be worthwhile either.

BTW WBC does have a good service model, but is also one of the worst lenders when it comes to LMI since they do their own
.
ta
rolf

 

[skater]

I mean how do you purchase one after next after next.
Is it in the time, i.e. have to wait until your properties goes up in value, or have to keep on saving?

It is the time factor. We have just had a large increase in prices across the board from the recent boom. Investors who bought a couple of years ago have made signifcant gains and it is through these gains that they have equity now to continue purchasing if they wish. Prices may stay stagnant, or fall slightly in near future.

 

[silene101]

I wouldn't allow a little thing like LMI to stand in my way of another purchase.
After all isn't it claimable as are all loan costs?

Silene101

 

[Ell]

Ok,

I did not know that LMI is tax deductible, which certainly makes it much better.

Ok, so say I want to buy 250K IP, but I only have 10K of my own equity left, still
2 income, no kids, therefore by going up to 90% I can only borrow probably no more than 100-120.
Is there are any way around it?

Another Q:
Has anyone been able to convince the bank to include the Tax savings from existing IP into calculation?

Also has anyone prepaid their interest on IP to excess more funds this FY Tax return?

 

[Rolf Latham]

Hi Ell

I believe you may be looking at this a little in too much detail.

Chat/Sit with a good indepdent broker, sounds to me like it can be done, but may need some restructuring.

yes there are lenders and mortgage insurers that allow interest deductions, and others will allow them to be used as a mitigant.

Rolf

 

[macca22]

just a quick question regarding LMI, i have a LOC setup which is at about 80% now if i was to try and get that increased and paid the LMI can i claim it as an expense or can u claim it only when u are actually financing another IP?

 

[Rolf Latham]

Hiya Macca

Two things

1. With many lenders, their loc products arent insurable (max 80% lvr) and with most others, 90 % is the max.

2. "Deductability" is often in the eye of the beholder. My belief, and more than half of my clients acctants belief is that ALL of the lmi premium is deductible as a borrow cost against income received from existing investments. If you currently dont have an investment then its not quite so clear, though again Id jump on the side of yes, because of the intent. Its one of the reasons where, when refinancing someone to 95 % we willoften do it in 2 stages, one to 80, the next to 95, unless we have an IP in the wings straight away.

ta

rolf

 

[Tikki]

Hi Ell,

Just going back to your original Q, have you asked the vendor to leave some money in the deal (say 30%)? You could ask to give him a cash payment at the end of 2/3/4 years, or multiple cash payments at certain times so that the full amount is paid within x years, or a regular weekly payment, or get them to wrap the remainder...
This way, you already have your 'deposit' money as far as the lenders are concerned. This has worked for me, and you only have to ask.

 

[tony100]

Hi Rolf,

I heard recently that LMI is refunded, on a pro rata basis, if the loan is paid out within two years. I was also told that, as a guide, if the loan is paid out after just one year, approximately 40% of the LMI paid is refunded. I have not looked into this yet.

Do you now if this information is correct?


Tony

 

[tony100]

Hi Ell,

I agree with Rolf; if you feel you would not be overcommitting yourself, you really need to sit down with a good mortgage broker - perhaps a somewhat aggressive one.

I have no idea what their lending policy is now but six years ago Bankwest did take the tax credits (generated from negative gearing) into account when assessing loan applications. It made quite a big difference to serviceability for some people (myself included).

There is another avenue that might be worth considering with regards to financing the "gap". I hit the serviceability wall about five years ago and, in hindsight can honestly say that it was the best thing that happened to me (in respect to financing properties) as it forced me to think more creatively. After looking into many options I decided to seek out private lenders. It may not be as hard as you think and things can happen much faster with private loans (as appose to with loans from banks). If you go down this road just make sure you really know your stuff, get a solicitor to draw up an agreement and be very careful about whom you borrow the money from.

Good luck.

Tony

 

[knightm]

T100

It sounds like you have used private lenders before - would you care to elaborate on the kind of cercumstances in which you have used this, and rough interest rate premiums, loan terms etc??? I know a broker who does this but would appreciate advice before I see him - so I don't get ripped off.

I am also at the wall and trying to get oustide the square I find myself in.

 

[tony100]

Knightm,

The basic terms were as follows:

Interest rate 11.5%. Standard unsecured bank rate at the time was 9%
Period 12 months
Security Personal guarantee and caveat over PPOR
Frequency Interest was capitalised so paid all back in one hit at the
end

I used the loan as part of the funding for my first small development.

As I mentioned before, you need to be very careful about who you borrow the money from. That being said there are probably a lot of people out there who would be willing to lend money (for a higher-than-average return) to someone they know and trust.

If you are going through a third party then you would be ultimately borrowing money from a complete stranger and this would increase risk substantially. Have you considered your existing network? You might be surprised. I have not borrowed from a complete stranger before but would be interested to hear from anyone who has - of their good and bad experiences.


Tony