Finance Decision - Cash or Equity

[lenojd]

Hi all

I'm about to exchange on my 2nd IP for ~$500k and I'm having a think about the best way to finance this.

For this deal, I can get a 90% LMI waiver from my lender (Lender B) so can borrow up to 90% LVR and can either:

1) Pay the 10% deposit + purchase costs with CASH (approx. 70k). This still leaves me with cash reserves of approx. 200k

2) Reval/refinance my IP1 up to 80% LVR - which is from Lender A (ie. different lender to the one I can now get a 90% LMI waiver from). This gives me conservatively 80-90k of equity (or up to 180k if being a bit more ambitious) of which I can then use 70k to put towards IP2 (the 10% deposit + transaction costs). This scenario won't require me to use any of my own Cash.

I want to avoid using as much of my cash as possible so option 2 achieves that although I just want to know will this cause potential problems down the line of being too highly geared (assuming lower scenario when it comes to my reval) ie at 80% LVR for IP1 and 90% for IP2?

Also, does it create a messy situation where my IP1 loan is partly used for IP1 and also used for IP2?

Generally how long will it take for the bank to arrange a valuation, refinance and then disburse funds for a deposit?

Another other advice/suggestions would be greatly appreciated. Thanks for taking the time to read through!

 

[Mick C]

Hi all

For this deal, I can get a 90% LMI waiver from my lender (Lender B) so can borrow up to 90% LVR and can either:

1) Pay the 10% deposit + purchase costs with CASH (approx. 70k). This still leaves me with cash reserves of approx. 200k

^ excellent, your an employee of the lender or your a Doctors etc..?
Either way, good set up- seperate lender to your 1st deal so def know it's not crossed + no LMI + 90% LVR leveraged. Make sure the deal is set as I/O ( if possible as not all No LMI at 90% allows for I/O - but doesn't hurt to ask)

2) Reval/refinance my IP1 up to 80% LVR - which is from Lender A (ie. different lender to the one I can now get a 90% LMI waiver from). This gives me conservatively 80-90k of equity (or up to 180k if being a bit more ambitious) of which I can then use 70k to put towards IP2 (the 10% deposit + transaction costs). This scenario won't require me to use any of my own Cash.

I would def do the reveal and take out the equity from IP1 to pay for Ip 2, but make sure you do this as a SPLIT loan not a top up. So efficiently your borrowing 105% with no crossing and no LMI.

I want to avoid using as much of my cash as possible so option 2 achieves that although I just want to know will this cause potential problems down the line of being too highly geared (assuming lower scenario when it comes to my reval) ie at 80% LVR for IP1 and 90% for IP2?

No issues being to geared, it's only your 2nd property and being an IP you have rental income anyway + your own cash is now sitting in an offset account reducing the interest anyway, so it's the same.

Also, does it create a messy situation where my IP1 loan is partly used for IP1 and also used for IP2?

Generally how long will it take for the bank to arrange a valuation, refinance and then disburse funds for a deposit?

Another other advice/suggestions would be greatly appreciated. Thanks for taking the time to read through!

It's only messy if you do a top up and don't structure it correctly OR if you take the money out of IP1 and place it into your personal offset account...make sure EVERYTHING IS separated in a nice clean cut.

1. Bank valuation - 1 to 8 days depending on bank, property type, location and access. Normally can be done within 3-4 days.

2. Interest refinance- ie a reveal with the same lender - Money will be ready within 1.5 weeks from full approval. The whole process generally takes 3 weeks including valuation/ mailing time etc ..

External refinance - Takes 40-50 days on average, can be faster if the new lender offers "fast refin" and can be slower depending on your current lender.


Cheers

 

[Aaron_C]

How about use Lender B to take your existing loan to 90% so you go 90% on both without LMI?

 

[Mick C]

How about use Lender B to take your existing loan to 90% so you go 90% on both without LMI?

That would work...but i doubt the No LMI policy applies to refinance; unless it's a $ to $ refinance with no cash out..... oh well if only we lived in a perfect dream world

 

[Rolf Latham]

equity every day unless your circumstances are unusual

You can always park unused cash outside

ta
rolf

 

[lenojd]

equity every day unless your circumstances are unusual

You can always park unused cash outside

ta
rolf

Thanks for the replies guys, and thank you Mick C for the detailed response.

I guess I knew the answer, just lacked the conviction to actually commit to that option as for some reason for a while I've just thought of using the cash money for deposit (and utilise LMI waiver where possible). Ordinarily I would have been borrowing 80% so I guess being able to go up to the 90% for 'free' has distracted me from worrying about the final 10%!

My only issue now is whether I can get the bank (Lender A) to arrange it in time as I will be exchanging and have until end of next week for the 5% deposit. I'll get on to them right away and see if they can make it happen.

Aaron_C - Unfortunately, the waiver is only for this purchase so can't refinance IP1 with Lender B in this instance

Mick C - Re the split loan v top up, what's the difference from the banks POV and then mine? Is it essentially just putting the revalued equity into a 'new' account rather into the 'same' account?


Thanks again everybody - you've been most helpful!

 

[Mick C]

Mick C - Re the split loan v top up, what's the difference from the banks POV and then mine? Is it essentially just putting the revalued equity into a 'new' account rather into the 'same' account?


Thanks again everybody - you've been most helpful!

^ bank's POV - no difference, maybe just a bit more work to create the new split

Your POV- A clear cut btw Ip 1 and IP 2 loans and should the "use or purpose" of each property change later down the track.ie you decide to move into Ip 1 or IP 2 than from a tax point of view the split is required as the top up would contaminate the loans.

 

[lenojd]

Thanks Michael.

It's amazing what banks can do when you apply a bit of pressure! Managed to get the the loan proceeds (equity) credited into my account with a new loan set up for the additional amount 1 day after visiting my lender!

The thing is, they money was credited into my savings account with the loan created for the same amount (ie loan liability). Since I won't need the full amount at the moment (only need the 5% deposit with balance + stamp duty etc due at settlement) I was thinking of transferring it all into the loan then redraw as required.

My understanding is that although I am putting cash into the loan (which I would normally never do), the cash is actually proceeds of a loan adn not mine to begin with so in this instance is ok.

Anyone else have a different opinion with this?

Cheers