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From: Mike .
How far is too far?
From: Bill
Date: 3/26/00
Time: 12:37:47 PM
Hi everyone,
I would really appreciate some advice. This is a longish note so please bear with me! (Les – if you are reading this I’d love to hear from you. Like so many others have commented your advice is fantastic, and I have personally found it has really helped me. Please keep up the good work!)
OK, here goes! We have one IP and I am keen to get in to a second. Things get a little complicated in that we have sold our current home (settling June 30), and are building a new home. We won’t move in to the new place until late June / early July. We are currently funding the construction of the new home as well as the remaining mortgage on our current home. In addition we are funding the IP with a fixed IO loan. When we settle our current home and finish the new place we will settle the debt on the current housing loan and establish a lower mortgage on the new place.
Being an avid planner I’ve created all the spreadsheets to prove to the bank we can afford to purchase a second property. Affordability is not the key issue. Collateral is the concern – or more to the point the ‘in progress’ nature of our loans, given we are drawing down on a newly established loan to fund construction of our new home. We would be at an 86% LV ratio if we purchased another IP this side of June, requiring mortgage insurance. My belief is that while I don’t like MI, if I need to take it (even $7-$8k as it is likely to be) it is a small price to pay for long term investment. As Jan says, if you need to take MI to get you into a property it is worth it, as it is tax deductible and long term is an insignificant cost of investment.
I’ve been in touch with Bank of Melb, who have all of our loans, including a second mortgage over our current property as collateral for the existing IP. I think they may proceed with finance if we want to purchase a further property however I feel it is going to be an ‘exceptional’ circumstance and a ‘big ask’. I wouldn’t say it is a definite. Not being one to say ‘no’ I met with a broker who was recommended to me, and he claims ‘no bank would touch us’ given we are constructing a home and the existing home is not settled, albeit contractually sold! His advice was to wait until after June and save $20k to use as a deposit for a new IP, and set up a stand alone loan for another IP with a bank other than Bank of Melb. If we can do this we may be able to set the new loan up so that it is 80% LV for the new IP with the IP being the sole collateral, meaning the property is unencumbered. The theory makes sense however here are my concerns :
1. If you are planning to purchase a large property portfolio over time, is it that big an issue that your second (and even third) IP is encumbered to your existing primary residence? My thought is that as your portfolio grows (as does it’s value), and you go through refinancing at various stages, you will have the opportunity to ‘unencumber’ . Why wait?
2. Saving $20k to set this new IP nicely is a good idea however it is going to take us a good 6 months + (being positive here!) to save that amount. We could already have 6 mth capital growth potential up our sleeve if we purchased in the next couple of months.
3. I believe in buying new places in good areas to maximise depreciation and minimise the risk of ‘something going wrong’. The GST doesn’t phase me as property investment is a long term plan. The rationale I use is that if I bought now I would have to pay $7-$8k MI, however post June we MAY be just on 80% LV ratio if we purchased a newly built PI. However we are likely to pay $15k extra in GST on a PI valued at around $170k. Look at it that way and MI is not a big deal. Also as I understand it if you pay MI on all your loans as is required first time around, a further loan at a later point will be the only component of your loans that is subject to MI if you are still over 80%.
4. The broker I spoke to intimated that if we are over 80% LV on our portfolio we are probably ‘in over our head’. I well and truly know my numbers backwards and this is certainly not true. The issue is what the banks may think!
5. Is there sense early on to start splitting your loans up among institutions? Over time I expect to have a few different banks funding IP’s however at this point don’t see it as a big deal if Bank of Melb is holding the lot.
6. Another piece of worldly advice the broker gave me is that as your portfolio grows, the banks start to view your investment as your primary source of income. They then start to apply business loan rules to their criteria, meaning that they may only lend up to 70% of less if you have a sizeable portfolio and want to purchase a further IP. Has anyone had experience with this one?
Sorry for the long note however wanted to get all the broad details on the table to complete the picture. I think this forum is brilliant and has certainly helped me a lot knowing I have a ‘lifeline’ to a lot of people in the same boat! Good luck to all and look forward to hearing from you.
Regards, Bill
How far is too far?
From: Bill
Date: 3/26/00
Time: 12:37:47 PM
Hi everyone,
I would really appreciate some advice. This is a longish note so please bear with me! (Les – if you are reading this I’d love to hear from you. Like so many others have commented your advice is fantastic, and I have personally found it has really helped me. Please keep up the good work!)
OK, here goes! We have one IP and I am keen to get in to a second. Things get a little complicated in that we have sold our current home (settling June 30), and are building a new home. We won’t move in to the new place until late June / early July. We are currently funding the construction of the new home as well as the remaining mortgage on our current home. In addition we are funding the IP with a fixed IO loan. When we settle our current home and finish the new place we will settle the debt on the current housing loan and establish a lower mortgage on the new place.
Being an avid planner I’ve created all the spreadsheets to prove to the bank we can afford to purchase a second property. Affordability is not the key issue. Collateral is the concern – or more to the point the ‘in progress’ nature of our loans, given we are drawing down on a newly established loan to fund construction of our new home. We would be at an 86% LV ratio if we purchased another IP this side of June, requiring mortgage insurance. My belief is that while I don’t like MI, if I need to take it (even $7-$8k as it is likely to be) it is a small price to pay for long term investment. As Jan says, if you need to take MI to get you into a property it is worth it, as it is tax deductible and long term is an insignificant cost of investment.
I’ve been in touch with Bank of Melb, who have all of our loans, including a second mortgage over our current property as collateral for the existing IP. I think they may proceed with finance if we want to purchase a further property however I feel it is going to be an ‘exceptional’ circumstance and a ‘big ask’. I wouldn’t say it is a definite. Not being one to say ‘no’ I met with a broker who was recommended to me, and he claims ‘no bank would touch us’ given we are constructing a home and the existing home is not settled, albeit contractually sold! His advice was to wait until after June and save $20k to use as a deposit for a new IP, and set up a stand alone loan for another IP with a bank other than Bank of Melb. If we can do this we may be able to set the new loan up so that it is 80% LV for the new IP with the IP being the sole collateral, meaning the property is unencumbered. The theory makes sense however here are my concerns :
1. If you are planning to purchase a large property portfolio over time, is it that big an issue that your second (and even third) IP is encumbered to your existing primary residence? My thought is that as your portfolio grows (as does it’s value), and you go through refinancing at various stages, you will have the opportunity to ‘unencumber’ . Why wait?
2. Saving $20k to set this new IP nicely is a good idea however it is going to take us a good 6 months + (being positive here!) to save that amount. We could already have 6 mth capital growth potential up our sleeve if we purchased in the next couple of months.
3. I believe in buying new places in good areas to maximise depreciation and minimise the risk of ‘something going wrong’. The GST doesn’t phase me as property investment is a long term plan. The rationale I use is that if I bought now I would have to pay $7-$8k MI, however post June we MAY be just on 80% LV ratio if we purchased a newly built PI. However we are likely to pay $15k extra in GST on a PI valued at around $170k. Look at it that way and MI is not a big deal. Also as I understand it if you pay MI on all your loans as is required first time around, a further loan at a later point will be the only component of your loans that is subject to MI if you are still over 80%.
4. The broker I spoke to intimated that if we are over 80% LV on our portfolio we are probably ‘in over our head’. I well and truly know my numbers backwards and this is certainly not true. The issue is what the banks may think!
5. Is there sense early on to start splitting your loans up among institutions? Over time I expect to have a few different banks funding IP’s however at this point don’t see it as a big deal if Bank of Melb is holding the lot.
6. Another piece of worldly advice the broker gave me is that as your portfolio grows, the banks start to view your investment as your primary source of income. They then start to apply business loan rules to their criteria, meaning that they may only lend up to 70% of less if you have a sizeable portfolio and want to purchase a further IP. Has anyone had experience with this one?
Sorry for the long note however wanted to get all the broad details on the table to complete the picture. I think this forum is brilliant and has certainly helped me a lot knowing I have a ‘lifeline’ to a lot of people in the same boat! Good luck to all and look forward to hearing from you.
Regards, Bill
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