Finance

[WebBoard]

From: Mike .


under one loan
From: Michelle R
Date: 14 Feb 2001
Time: 12:06:53

My finance broker is suggesting I refinance to obtain maximum funds. Set up my mortgage and any investment borrowing all under one line of credit or a home equity style loan. I've had a loan like this once before and rather liked it.

Recently I was about to switch my home loan with St George into what they market as a portfolio loan. I've held off because,they were not prepared to loan me the amount I wanted for investment. Can anyone see disadvantages to putting everything under one loan?

There is a higher interest rate about 8%. I can't lock in (I don't think). The broker seems to think if I collect rental funds this would go into the mortgage account, with the calculated interest daily advantage it will reduce the term of the loan. I know thats how it works (got the book) but I'm uncertain if this is the best way to go when buying investment property?

Cheers Michelle R

 

[WebBoard]

Alston

Reply: 1
From: Mike .


Re: under one loan
From: Alston
Date: 14 Feb 2001
Time: 13:33:40

It is never a good idea to mix personal loans (ie loan for owner occupied property) and investment loans together. Firstly, it becomes difficult to determine the interest component of the investment loan from that of the personal loan for tax purposes. Secondly, when you have additional funds, you would want to pay this off your personal loans only as this interest is not tax deductible. However, if the personal and investment loans are mixed, the ATO will take the position that the additional funds were paid off all the loans in proportion. If you then wish to access these funds for personal use, the interest on the amount that you have redrawn off the investment loan component will not be allowed as a tax deduction. Eventually, you will end up paying off your tax deductible loan at the expense of your personal loans (exactly the opposite to what you want to do).

Insist that your mortgage broker arranging a separate loan for your personal mortgage with a redraw facility. Don't let them fool you with this not being possible or increasing fees. This is a basic product that all the major banks and most of the others offer. Then have your rents paid onto this loan and then have your other loan repayments automatically drawn from this loan.

You can also have salaries, etc paid into the loan and use the redraw facilities. This will give you the maximum benefit by using all availble cashflow to payout you personal debts first.

Personally, it is my requirement that each loan relates to only one property. I have a situation of two loans for one property (one secured by the property and the other secured by other properties) but never one loan for more than one properties. Unlike other contributors to this forum, I do not have a problem with cross security, particularly where the properties are to be held for growth.

Alston

 

[WebBoard]

Rolf

Reply: 1.1
From: Mike .


Re: under one loan
From: Rolf
Date: 14 Feb 2001
Time: 14:36:47

I would agree on the offset vs the LOC mainly on the basis of lower interest rate.

STG LOC Portfolio gives you the opportunity to have many loan splits regardless of lines of security and is therefore a good product for separating personal and investment debt. Great flexibility. Unlikely to be the most cost effective method though.

What rate you can get on the offset account depends on a lot of factors, depending on lender, such as volume borrowed, your occupation, your income, the amount of security offered etc.

If you are looking for maximum borrow cap Homeside is good since they allow 100 % of your rental in their loan affordability model, vs the common 75-80.

Ta - Rolf

 

[WebBoard]

Michelle R

Reply: 1.1.1
From: Mike .


Re: under one loan
From: Michelle R
Date: 14 Feb 2001
Time: 16:39:50

Thanks Alston and Rolf, I checked with my accountant and he agreed with you both. Another question: I have a few lenders that will give me up to a certain amount. I have another that will give me substanially more - about the amount I thought i might need. Thing is, this lender's rate could be slightly higher, only .5. The longest fixed term they offer is 3 yrs.

What do you think? Go for the dollars or are terms everything? I should add I may be looking to negative gear. I realise it's out of favour, even with myself. My town has great capital growth. You cannot get a positve rental return, except with commercial property.

Cheers - Michelle

 

[WebBoard]

Rolf

Reply: 1.1.1.1
From: Mike .


Re: under one loan
From: Rolf
Date: 14 Feb 2001
Time: 21:07:41

Hi Michelle

When you say .5 do you mean half a percent ? Because that is quite a big difference in real interest cost terms. Based on a 7.00 % loan another loan at 7.50 with the same conditions and features will increase your interest cost by $ 500 per 100 000 borrowed - bears thinking about if a big loan.

On the other hand if you need the extra $ that the lender is offering you to buy into the position or quality of property you really need then you can easily justify the increased cost.

No need to be shy, which lenders are we talking about, I suspect you can find the best of both worlds, the higher $ you are looking for and the lower rate.

Ta - Rolf

[email protected]

 

[WebBoard]

Anna

Reply: 1.1.1.1.1
From: Mike .


Re: under one loan
From: Anna to Rolf
Date: 14 Feb 2001
Time: 16:12:49

How's it going?

You mentioned about the usual model of 70 to 80% of rent counted. Is this gross or nett?

 

[WebBoard]

Andrew

Reply: 1.1.1.1.1.1
From: Mike .


Re: under one loan
From: Andrew
Date: 14 Feb 2001
Time: 21:06:43

They use 80% of the gross which should equal your nett roughly.

Andrew (not Rolf)

 

[WebBoard]

Rolf

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: under one loan
From: Rolf
Date: 14 Feb 2001
Time: 20:57:47

Hi Anna

Things are going well. Hope your bank has come to the party and your businesses are going >>>.

Most lenders accept 75 % of gross rental income. Some 80 % and one or two will take 100 % of gross rental income, as ever everything is on a case by case basis as you have confirmed.

Ta - Rolf

 

[WebBoard]

Anna

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: under one loan
From: Anna to Rolf
Date: 15 Feb 2001
Time: 16:45:19

Thanks Rolf

CBA have changed their calculations I think to my benefit.

Total credit/loan payments less 70% rent = A A + new repayments = % of salary.

This is a big improvement of rent being added in with gross income. If properties are positively geared they have nil or positive impact on loan serviceability. What are your comments?

Yes, bank has changed policy and approved to 80%. Took them 2 hours!

Kind regards.

PS Thanks for your helpful contributions to this forum.

 

[WebBoard]

Rolf

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: under one loan
From: Rolf
Date: 15 Feb 2001
Time: 17:45:53

Hi Anna

Thanks for the encouragement. I get at least twice as much out as I put in.

Rent being added to gross - some will only take 75 % one or two will take 100 %. If a property is +ve geared then this will improve serviceability a little but not a lot - I'll work some figures later for an example since your question poses an interesting point for the 10 ++ property "wrappers"

Ta - Rolf

 

[WebBoard]

Anna

Reply: 1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: under one loan
From: Anna to Rolf
Date: 16 Feb 2001
Time: 12:02:19

Think I was on drugs when I wrote that last posting.

My point is that CBA's new calculations DO NOT add rent to gross salary and then work out what % of income repayments are.

The rent (70%) is deducted from the repayments before the salary is looked at.

Eg Total repayments per year $50, 000 Total rent (@70%) $50, 000

Repayments are cancelled out by rent which is positive even at 70%.

Salary $65, 000

Repayments Nil (cancelled out by rent)

Bank will lend to 35% plus of gross salary depending upon risk factors.

Highly positively geared properties would then improve your borrowing position. (as they should !)

I see this as a huge improvement.

Have I confused you more??