Finance

[WebBoard]

From: Mike .


Refinancing IP- I need advice
From: Simone
Date: 21 Feb 2001
Time: 20:42:25

Hi All,

I was hoping that someone could help me! I purchased a 3 bedroom investment property in '97 for $150k. It was brand new off the plan. I paid 15K deposit and borrowed the remaining 135k in a fixed loan for three years at 6.85%. I receive $250 pw rent which equates to a 8.66% return on the purchase price. I have had the property recently revalued at 230K. I was thinking about refinancing.

I have worked out that I could potentially refinance the loan up to 200k at a fixed rate for 6.65% (currently noted at ANZ) and my current rental income would produce 13k P.A covering the new interest bill of $13,300 P.A. My understanding of this is that I would effectively have 200k-135k=75K (refinanced loan - initial loan), at my disposal tax free to re-invest elsewhere if I choose to. I see this as just withdrawing the equity from my rental property and making it work elswhere, rather than leaving the equity lie dormant (non compounding) in my property. Is my understanding correct?

If it is correct, I could refinance up every few years and withdraw my equity. I would never need to sell, and even if I did - would never be subject to capital gains tax as my liability would be almost always equal to the property value. This should always work as long as the incoming rent is enough to cover the total interest payments required for the loan.

The only downside that i can see, is that my original plan to invest in multiple properties, sell a few when I wish to retire and repay the initial loans, and then live off the rental income of the remaining properties would not be possible. As there would be no equity to pay off total liabilities as all my mortgages would have been refinanced up to the max.

I would love to hear some feedback regarding my idea, as i am not absolutely confident that I am thinking of this in the right way.

Thanks - Simone

 

[WebBoard]

Rolf

Reply: 1
From: Mike .


Re: Refinancing IP- I need advice
From: Rolf
Date: 21 Feb 2001
Time: 22:25:30

Hi Simone,

Sounds like you have it pretty much worked out. Although no tax expert, my understanding is that CGT is only payable when the capital gain of the asset is realised via a sale.

Providing you use the proceeds of the loan for further investment use then the interest on the increased amount can also be a tax deduction.

Some good rates around at the moment isn't there ?

You can do marginally better though. Depending on your other circumstances you may be able to get a variable rate not far off your quoted rate, which given the current downward trend MAY be a more economical way to go.

Sounds good - Go for it.

Ta - Rolf

[email protected]

 

[WebBoard]

Alston

Reply: 1.1
From: Mike .


Re: Refinancing IP- I need advice
From: Alston
Date: 22 Feb 2001
Time: 07:07:21

Welcome to the world of 'buy and hold' real estate investing. This is exactly the process that have made a lot of people very wealthy.

You are not correct about CGT. CGT is based on your selling price and the price you originally bought for and has nothing to do with the loan.

I suggest you read Jan Somers book to learn more about this approach.

Alston

 

[WebBoard]

Simone

Reply: 1.1.1
From: Mike .


Re: Refinancing IP- I need advice
From: Simone to Alston or anyone who can help.
Date: 22 Feb 2001
Time: 08:24:30

Thanks for your comments.

How often should you refinance your loan, is there a general rule? Do you do it once a year when the capital grows or do you wait a few years?

Does the originating lender usually help out with refinancing or do you generally go to another lender?

Do the lenders refinance upto 90% again or less?

Thanks, Simone

 

[WebBoard]

Alston

Reply: 1.1.1.1
From: Mike .


Re: Refinancing IP- I need advice
From: Alston to Simone
Date: 22 Feb 2001
Time: 10:56:03

In answer to your questions:

How often to refinance? This is not really an issue. If you have the equity and the deal, monthly if that's what it takes (I am being a bit extreme, but as often as you want and need). Keep a regular eye on what your existing portfolio of properties are worth and how much extra equity you have. I prefer to only borrow against existing assets to 80% to avoid excessive Lenders Mortgage Insurance (LMI) (I will discuss below). If you add up your estimate of the current value of your existing properties, multiply by 80% and then subtract the existing loans, this is the additional borrowable (is this a word?) equity that you can use as deposit on your next acquisition.

Existing lender or new lender? Contrary to other comments on this forum, I tend to stick to one lender for all my buy-and-hold properties. They already hold the mortgages so it is a bit easier. In my opinion a 0.1% difference in rates is often less important than a relationship with a flexible and understanding banker. Besides, the difference in rates is tax deductible and if the deal is so close to the line that this difference in rates kills it then the deal is borderline to start.

LVR 90%? You can certainly keep going to 90% or more with LMI. However, in my experience, the LMI is based on the size of the loan exceeding 80%. Thus, if you have a number of properties, the loan size becomes large and the LMI will become very expensive. The approach I have used is to have two loans for the new property. The first loan is secured by the new property and is to 90% (or more) with LMI. The second separate loan is secured by other properties and is to 80% of the value of those properties. There should be no LMI for this. You need to look at what combination of the existing properties to use to give you maximum equity. This loan may be in the form of an LOC.

Alston

 

[WebBoard]

Rolf

Reply: 1.1.1.1.1
From: Mike .


Re: Refinancing IP- I need advice
From: Rolf
Date: 22 Feb 2001
Time: 09:15:10

Hi Simone

Generally refin every 12 months would not work in the middle to long term - as we know cap gain is not a straight line graph.

It helps if you have a distinct purpose.

Yes generally most lenders like to hold onto their borrowers and will do what you want them to.

Simone, find yourself a broker you are comfortable with - similarly to a good mechanic they will keep your loans properly serviced and will generally be able to tell you what sort of val you can expect. A lot of us have access to very tight access to sales data.

90 % refinance is OK, but be prepared for a bit of a mess with mortgage insurance.

Ta - Rolf

[email protected]

 

[WebBoard]

Simone

Reply: 1.1.1.1.1.1
From: Mike .


Re: Refinancing IP- I need advice
From: Simone to Rolf
Date: 22 Feb 2001
Time: 12:30:51

Thanks again!

Your comments suggest that it isn't a good idea to refinance every 12 months as CGT isn't a straight curve. Could you explain how CGT impacts upon me refinancing my mortgage?

Thanks - Simone

 

[WebBoard]

Rolf

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: Refinancing IP- I need advice
From: Rolf
Date: 22 Feb 2001
Time: 13:32:03

Hi Simone

Increased equity and a refinance is only possible if the IP has gone up in value. Capital Gains tax is not an issue, but it is a known fact that sometimes property languishes and does not grow. Refinance in that scenario wont help because there is no spare equity in the IP to draw upon. Remember the early 90s in NSW maybe ? rather quiet on average for capital growth over this time.

Regards - Rolf

[email protected]