Finance for IP

Hey guys,

I am working out the best way to structure my finance for the next property I buy, currently in PPOR and owe which I owe $250,000 on and am renovating, shooting for $380,000 once completed. Was going to rent out PPOR but after talking it over with my girlfriend, we have no real need to move at this point so we might as well stay here seeing as the reno has turned out great so far :D.

Am in the process of converting PPOR loan to IO and sitting the extra funds in my offset as although I am living here for the forseeable future it wont be forever.

What would be the best way to get to my equity? I am seeing a lot of talk of LOC loans but I am unsure of this as from what I understand they are at a higher interest rate.

And then taking out an IO loan for the remainder of the amount with a separate lender to the one I use currently.

I realize this question is covered a lot in some way shape or form but I was just chasing a bit of an answer on my situation.

Thank guys, I appreciate it.
 
For the equity release - I would set it up as a term loan with a linked offset.

Ensure that you create a separate facility and do not do a topup of the existing loan.

Re the LOC - yes it carries a higher interest rate with MOST lenders but not all.

Have you paid LMI on the existing loan?
 
I'd set up a second interest only variable split and park the equity release back into the loan - and redraw later for investment purposes.

Depending on how much equity you require - it could be worth while getting a couple of upfront valuations done.

Cheers

Jamie
 
Thanks Jamie, you are always quick to reply!

So a variable split, are you referring to split interest rate loan i.e 80% fixed 20% variable?

Thanks.
 
No probs :)

If the property is worth $380k then you'd set up two loans.

Loan 1: Current loan of $250k
Loan 2: Equity release loan of $54k (set up as variable, interest only)

A few assumptions though:

- That $54k equity release assumes an 80% LVR. Some lenders will allow you to go to 90% with LMI payable. In this instance, the equity release could go up to $92k with LMI.

- If you paid LMI on your previous loan - it's probably going to be more cost effective to stick with your current lender if borrowing up to 90%

- The same applies if the current loan is fixed

Cheers

Jamie
 
Hey Jamie,
When you say pay the equity release back into the loan1 and redraw do you mean into the offset or back into the actual loan?

If into the actual loan then how do you redraw it for investment purposes without contaminating it?

Pardon my ignorance on this, it is the one area I am having trouble getting my head around. I think I need pretty pictures to visualize the structure!
 
Into the actual loan.

As long as it's redrawn for investment purposes it won't be contaminated.

If you redraw it for mixed investment/personal use you will.

Cheers

Jamie
 
No probs :)

If the property is worth $380k then you'd set up two loans.

Loan 1: Current loan of $250k
Loan 2: Equity release loan of $54k (set up as variable, interest only)

A few assumptions though:

- That $54k equity release assumes an 80% LVR. Some lenders will allow you to go to 90% with LMI payable. In this instance, the equity release could go up to $92k with LMI.

- If you paid LMI on your previous loan - it's probably going to be more cost effective to stick with your current lender if borrowing up to 90%

- The same applies if the current loan is fixed

Cheers

Jamie


Ok mate, thanks for that.

I didn't pay LMI on my current loan.

If I was to go above the 80% LVR the LMI is tax deductible, yes?

The plan is to accrue at least 2 properties over the next 4 years. So by the looks of things ideally I would buy IP with equity release at 80% LVR, add value and then do the same equity release loan as I did initially but this time against the IP.

If there wasn't enough equity in the IP can I re-do the equity release on PPOR to cover the shortfall of the IP equity release? But the. I guess I would be paying two lots of LMI.

aaaaaaaand now I've confused myself, haha.
 
Hey Jamie,
When you say pay the equity release back into the loan1 and redraw do you mean into the offset or back into the actual loan?

If into the actual loan then how do you redraw it for investment purposes without contaminating it?

Pardon my ignorance on this, it is the one area I am having trouble getting my head around. I think I need pretty pictures to visualize the structure!

I agree mate, pictures make everything better!
 
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