Reply: 1
From: Mike .
Hi Firefrog,
Here is one way that you can do it:
Miss Jackie Davis owns her own residence (that she's been paying off for a number of years) and wants to purchase an investment property but doesn't have enough cash for a down payment.
Her owner occupied residence is valued at $270,000 and she has an outstanding mortgage of $165,000 (she's financed through an XYZ bank Standard Variable Rate home loan at 7.15%). Her current monthly repayment is $1,182 (totalling $14,184 each year).
The property she wants to purchase is being sold for $200,000. By refinancing her owner occupied residence with an Equity Alternative for $205,000 she'll have an extra $40,000 (after the refinance) to apply to the purchase of her investment property.
Jackie then takes a second loan for $160,000 to purchase her investment property and applies $40,000 from her refinance to complete the purchase. Her second loan will have a monthly repayment of $1,191, and she will have a rental income to offset this amount.
Me again: In the above example, Jackie Davis has consolidated the IP deposit loan with her Home Loan, and the IP is self-secured. Alternatively, you keep the $40,000 as a separate loan via a Line Of Credit and still avoid cross-collateralization (ie the IP is self-secured).
The third option is to take out a 105% loan to cover the entire purchase price of the IP plus purchase costs but use your home as part security. The advantage of this option is you can have the entire loan as Interest Only and fix the interest for 3,5 or 10 years. Whereas you have to make principal and interest repayments on the first option and while you don't have to pay down the LOC straight away, the rate is usually Variable.
Remember, Miss Jackie Davis could do this because she had $105,000 of spare equity. Which is the difference between her residence valued at $270,000 and the outstanding mortgage of $165,000.
Regards, Mike