Finance

[WebBoard]

From: Mike .


Investment Loans
From: Steve
Date: 6/27/00
Time: 2:17:18 PM

Could anyone please tell me the difference between an investment home loan and a normal home loan. I am just starting out. Thankyou

 

[WebBoard]

Cisso

Reply: 1
From: Mike .


Re: Investment Loans
From: cisso
Date: 6/27/00
Time: 8:21:34 PM

steve..you sound very much a novice like myself..I am unwilling at this stage to take the first step..I have been looking at the Investors Club as this seems to be an "in" but have not decided yet whether they are ok..will keep researching..that's the key..good luck with your investing.

 

[WebBoard]

McSpaniel

Reply: 1.1
From: Mike .


Re: Investment Loans
From: McSpaniel
Date: 6/27/00
Time: 5:47:34 PM

I'll have a go.

I'd say a home loan is what you take out to put a roof over your own head; whereas an IHL is what you take out to put a roof over someone else's head.

Also , in australia, under our tax laws, the interest paid on a home loan is not tax deductible; whereas the interest on a IHL is tax deductible (assuming the loan was taken out to buy an income producing property - as distinct from say a vacant block of land).

How's that?

 

[WebBoard]

Rae

Reply: 1.1.1
From: Mike .


Re: Investment Loans
From: Rae
Date: 6/27/00
Time: 7:51:00 PM

Just an extra add on. Shop around. A lot of Investment loans will actually be slightly higher than a normal Home loan (but not all). Take your time looking and find the right loan for your investment plan. Regards, Rae.

 

[WebBoard]

The Wife

Reply: 1.1.1.1
From: Mike .


Re: Investment Loans
From: The Wife
Date: 6/29/00
Time: 9:49:46 PM

Just another footnote here, Did you know you can haggle with the bank? Still do a run around and get the best loan you can, and then if it isnt your preferred bank, you can go back to your prefered bank and haggle, we didnt the first time, we did a little the second time, and this time we just plain said...oww i aint paying that!! and they haggled with me!!! yippeee...

 

[WebBoard]

Les

Reply: 1.1.1.1.1
From: Mike .


Re: Investment Loans
From: Les
Date: 6/27/00
Time: 11:30:48 PM

G'day Steve,

I believe there are several differences between them (some obvious, some not so obvious).

Home loan - typically Principal & Interest loan (where you pay extra off the amount owing each month). Common today for a lender to allow you to borrow up to 95% of THEIR valuation, so you need to find 5% (plus costs) to buy a home. No Tax deductions allowed (unless you take in boarders, or maybe run a business from home, in which case a percentage of your expenses can be claimed as a Tax deduction). Also, no Capital Gains Tax is paid if you should sell your home in the future - I don't recall if there is a minimum term for this (12 months?).


Investment Loan - cheaper to service - usually Interest Only (but can be P & I) usually up to 90% of lender's valuation. You therefore need 10% (plus costs) of your own money to make the deal. However, because of expected rental income, a lender will often let you borrow more (or the same amount EARLIER) - so it can be easier to get finance on an IP than on your own home. As well as the rental income, there are also Tax Deductions that are allowed on an IP (Building Allowance, Depreciation, and Borrowing Costs) that are NOT available if buying your own home. Rae (I think) also mentioned that some lenders might charge a higher Interest rate for Investment Property loans - fortunately, with competition keeping them "honest", this is less common today - but still happens.

And, come July 1, if you are buying YOUR FIRST home, you will receive the FHOG (First Home Owner's Grant) to assist in the purchase. I'm not sure if this also applies to "your first Home as an Investment property" (I left all of that behind YEARS ago - all right, all right, decades ago - so I haven't been too motivated in following that up ;^)

A lot of good books go into far more detail over the differences - if you haven't already, go buy Jan's "Building Wealth through Investment Property" - it is a great book to get the brain "ticking over" in this area.

I hope that goes some way to answering the question - Jan's book will go SO MUCH further (if you want to order it online, just go to the Somersoft Home page and "follow the bouncing ball").

Regards, Les

 

[WebBoard]

: Ron

Reply: 1.1.1.1.1.1
From: Mike .


Re: Investment Loans
From: Ron
Date: 6/28/00
Time: 1:17:35 AM

Les

Please clear up one thing for me as a newcomer.

If you have suitable equity in your home for an IP do you physically put up that money ie. put it on the table as a deposit?

My understanding is that this merely forms the security and the IP can be geared to more than 100% to cover all costs and setup fees. This is what I have understood the principle of IP investing to be.

There is so much discussion about 10% and LOC's on your residence I'm confused! It would seem like your home mortgage goes up by 10% to cover the IP deposit.

Please explain.

 

[WebBoard]

Les

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: Investment Loans
From: Les
Date: 6/28/00
Time: 5:41:24 PM

G'day Ron,

There are possibly several ways to do this. I am guessing here, but if they allow you to borrow 100+% on an IP, then I would THINK your lender has probably cross-collateralised your home with the IP. i.e. if you run into problems, the lender can foreclose on both.

The way I did mine was to use a separate lender to borrow against my own home. They created a mortgage for this, and I have borrowed cash from them. When settling on an IP, "cash goes on the table" as the deposit - and that cash came from that loan on my home.

The IP's are with ANOTHER lender. They do not have "dibs" on my home. So the other lender loans me 90% of the IP purchase price, and create their mortgage. My "cash" makes up the ~15% for the 10% deposit, and costs. ALL of these loans (including the one on my home) are Tax deductible, as the purpose of the Home mortgage was to buy IP's (we'd previously paid out the Home Loan).

You are pretty near right when you say "your mortgage goes up 10% on your home" (it may well be 14 - 15% to cover costs). When you do this, make sure the extra mortgage amount is kept SEPARATE from your ordinary Home mortgage, since the IP mortgage (for deposit and costs) are Tax deductible. Then put your effort into reducing the other (non-deductible) portion of the Home mortgage.

It certainly is a huge subject, and experienced investors will note areas of my answer that may not be "the whole truth" - I wanted to keep it simple.

Just remember Jan's words where she says she can spend 6 weeks arranging finance, and a few days picking a suitable property. You are starting to understand why!!!!!! It can be very involved - so start reading up on this area, and you'll be streets ahead of the average person.

Does this answer the question for you, Ron?

Regards, Les

 

[WebBoard]

Ron

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: Investment Loans
From: Ron
Date: 6/28/00
Time: 6:44:05 PM

Thanks Les

Champion answer, and the murky waters are clearing somewhat already!

As I am not in your situation of owning my own home would you advise that I use my current lender for the deposit - this is where a LOC may come into play - and then go another bank for the IP loan?

Or are you suggesting three banks are the way to go?

I did notice Jan's comment although I am seeing now that this is a big part of the whole game. In the longer term how does this assist you avoiding getting 'equity locked'? Perhaps you could explain the scenario of IP2 coming along at a later date for demonstration purposes.

Thanks

 

[WebBoard]

Les

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: Investment Loans
From: Les
Date: 6/28/00
Time: 10:04:32 PM

G'day Ron,

Let's take them one at a time, and see what I can do:-

Ron> "As I am not in your situation of owning my own home would you advise that I use my current lender for the deposit - this is where a LOC may come into play - and then go another bank for the IP loan?"

Les> Yeah - if your current lender is amenable to this, start with them. How are their rates? Are there others that could do a better rate? Would it be worth paying the extra fees to borrow from a new lender? If there's little in it, you at least have the "track record" with them - so try them out. Some lenders (e.g. NAB) offer 0.5% BELOW the current variable depending on your income, and the amount you are borrowing for IP - it's worth asking (NAB calls their package "Investor's Choice", or something like that).

Ron> "Or are you suggesting three banks are the way to go?"

Les> Depends how you went with your original lender. To involve a 3rd bank means someone takes a 2nd mortgage, so probably little chance of that happening (at least not in the "mainstream" of lenders). It's an option if your own bank let's you down, though.

Ron> "I did notice Jan's comment although I am seeing now that this is a big part of the whole game. In the longer term how does this assist you avoiding getting 'equity locked'?"

Les> That question would be better left to someone who's "been there" - I'm a newbie in this IP game. I could guess, but it's better for you (AND ME) if someone else can provide an answer to that one.

Ron> "Perhaps you could explain the scenario of IP2 coming along at a later date for demonstration purposes."

Les> This is where an Offset account (or LOC?) is useful. As you put extra cash into your "Home Loan", it remains available to draw out again for the deposit & costs for IP#2. Again, even the right selection of this is a science!!! There are so many flavours out there - not all good - so attack that choice as a whole separate issue and put some time into finding what suits you (and why!!) Maybe Brokers can help out there.

Suggestion:- Don't go "leaping in" without a whole bunch of due diligence. Read all forum entries re this subject, Jan's ideas, and talk with like-minded people. There's a lot to be learned here.


Regards, Les