Finance

[WebBoard]

From: Mike .


Equity
From: HS
Date: 25 Jan 2001
Time: 22:16:05

Hi, I would appreciate some advice about equity? Is it true that when you access the equity in your home for a IP, that the bank will use your home as security? Can you use the IP as security rather than your own home?

Thanks HS

 

[WebBoard]

Mike

Reply: 1
From: Mike .


Re: Equity
From: Mike
Date: 26 Jan 2001
Time: 01:59:49

Hi HS,

If you borrow more than 75% of the purchase price, the bank will use 75% of the IP value for security and 25%+costs will be secured against your home.

In my case, the IP purchase price is $189,000. The IP is secured for 75% and my home secures the balance plus costs. Loan amount incl costs was $196,000. The IP is now valued at $230,000.

Can I transfer total security to the IP? If the bank takes 75% of the Cap Gain ($30,750) and adds it to 75% of the purchase price ($141,750), the total is $172,500. Since the loan is for $196,000, I am still $23,500 short. I would need to make a cash deposit of $23,500 to have the IP secured by itself.

Regards, Mike

 

[WebBoard]

Sim

Reply: 1.1
From: Mike .


Re: Equity
From: Sim'
Date: 26 Jan 2001
Time: 07:41:06

If you have some type of redraw facility (or LOC or "Equity Credit" facility) on your home loan, you can use money from that for the shortfall.

ie. take out a loan for 80% against your new IP (or whatever figure you need to avoid paying mortgage lenders insurance if you wish to), and then find the extra 20% plus expenses from your redraws and/or cash savings.

The investment loan is secured ONLY against your investment property. There is no connection between the investment loan and your residence.

The biggest issue is to be careful with the redraw... if you cannot keep track of the funds used for investment purposes and keep them separated from the non-investment funds, it will be very difficult to accurately calculate investment interest. The ATO take a dim view of this, so do it right !

Some institutions will let you split your home loan redraw facility into separate logical loans, and you can allocate one for investment purposes and hence track the investment interest that way.

Sim'

 

[WebBoard]

Mike

Reply: 1.1.1
From: Mike .


Re: Equity
From: Mike
Date: 26 Jan 2001
Time: 22:48:13

Hi Sim',

When is it appropriate to employ 2nd mortgages? I was browsing through a book the other day and a piece of info grabbed my attention. The point was that you don't refinance unless the prevailing interest rate is 2% lower than the interest you're fixed with. If it's less than 2%, then it's better to take out a 2nd mortgage on the IP.

Unfortunately, I didn't have a pen with me to copy the example and when I returned to the bookstore later I couldn't find the book. Any ideas what they were on about?

Regards, Mike

 

[WebBoard]

Sim

Reply: 1.1.1.1
From: Mike .


Re: Equity
From: Sim'
Date: 29 Jan 2001
Time: 15:46:41

Hi Mike,

My personal opinion is to avoid anything which complicates matters.

If you take out a 2nd mortgage on a property, then there are two parties who need to be kept happy when you want to do something to it (such as sell it, insure it, wrap it etc.)

Now, in practice this may not actually matter much, but if possible I always prefer to keep only a single mortgage over a particular property.

...but of course that is only my opinion and didn't actually answer your question... I don't actually know when you would be better in a financial sense to use a 2nd mortgage.

Sim'