Financing an IP

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From: Anna Novakovic


Hi all,
I am just about to purchase my first IP. I have spoken to my accountant who has stated that I have enough equity in my home to purchase an IP.
I have been doing my own research for the past 8 months on potential IPs and the property market and am now in the process of arranging finance.
I have read previous postings on LOCs, deposit bonds, I/P loans and IO loans.
My question to you all is what is the best way to borrow as much as possible for the IP? In the past I have placed most of my earnings against my home mortgage, as I have a redraw facility (if I get desperate), so as to pay off as much as possible against my home and reduce my interest there.
I was thinking of getting a deposit bond for the deposit and borrowing as much as possible for the settlement, or do I have to redraw my money from my home mortgage to the % the banks will lend me. eg 80%.
Will all institutions want my home as security as well as the investment property and to refinance my home loan as well.
I want an fixed IO loan for 5years for the IP, but I didnt really want to have to refinance my home mortgage.
Am I better of getting an LOC (not that I understand these very well, I guess thats why I am asking).
I have approached a mortgage broker, but want to be informed when they start providing me with different options.
I am based in Melbourne but am buying interstate, so what are the pitfalls?
Any information would be greatly appreciated.
Thanks
 
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Reply: 1
From: Rolf Latham


So many questions

You will have to stick your deeds up for security most likley.

Loc Line of credit is NOT always the best option, depending on your particular situation. If you are high income earner there are cheaper ways !!

Buying Interstate - you know the rules on due diligence. Providing you pay the right price this will not affect your finance at all
Ta

Rolf
 
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Reply: 1.1
From: Rolf Latham


I have jyst re raed my post - from waht you are saying, it would look like you would not wither have to refinance your home, but might want to convert to a plit loan so that the redraw is separate tax deductible loan for dep + costs.

Also that way security of home not required for I/O IP loan !

Ta

ROlf
 
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Reply: 1.1.1
From: John (Brisbane)


Rolf,

Just read your last post, better stay away from the Red Wine Mate!!

...he he he he he he he
 
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Reply: 2
From: Miakat .


Anna,

I was pretty much in the same position. We went with a 5 year IO loan for 110% value of the IP. Our Home Mortgage was reduced accordingly (No more massive redraw...there goes my temptation). As security on the IP loan, they used 90% of the value of the IP plus whatever was left against the Home. Hope to revalue IP soon, so it is no longer cross-collateralised.

How'd I go ?

Mia
 
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Reply: 2.1
From: Anna Novakovic


Thanks Mia, info is much appreciated. and am currently working through the pros and cons of some options given to me.
Regards
Anna
 
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Reply: 3
From: Grant A-Y


Anna,

I suggest you look at LOC if you want to become a serious IP player. Benefits: you don't have to tie up your own house with a mortgage over both home and IP, they are separate; you use 10-20% of your LOC as a separate loan (3-5yr fixed io) to pay your deposit and other costs, then borrow the rest for the main mortgage on your ip. If you borrow 90% you will be up for mortgage insurance, but at least you keep more of your LOC equity to buy more IPs.

This is what I have done anyway!.
 
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Reply: 3.1
From: Sim' Hampel


Hi Grant,

You suggested using a LOC to help fund IP purchases, and I was wondering how many you have bought that way (ie. what is the size of your LOC ?)

The reason I ask is that I have been warned about having large LOCs (we were about to set up a $150K LOC), as most lending institutions will penalise you for having large amounts of credit available to you (regardless of whether you actually use it or not).

By penalise I mean, when taking into account your financial position to determine whether to approve your next loan, they look at the LOC and say "hmm... in our experience, people with LOCs tend to go crazy bying holidays and cars etc... we'd better be careful". Doesn't matter if you are strictly using it for IPs and are really disciplined... the person at the bank who actually approves the loan often doesn't know you ! They also tend to do their calculations as if you were paying a couple of percent extra on your loan.

Now I will say that I haven't had this experience myself, but I was told this by someone whose opinion I trust and who HAS experienced this. This person told me I wouldn't have any problems with my LOC until I had several properties and was getting up to several hundred thousand on the LOC. This is exactly what happened to them... the banks started umm-ing and ahh-ing when they were applying for new loans.

Now if you are not planning to purchase lots of property then you should not have any problems and the LOC might work well. For myself, I've decided that since I am looking to buy as many as I can, I'd better learn to play the game as the lending institutions like it (I hate that !).

One thing I've noticed... all the people I talk to who have multi-million property portfolios... use one of the 'big four' banks. I'm sure someone out there will find someone who isn't, and it may also be that people who already have multi-million dollar portfolios have been investing for quite some time, and all the new lending institutions have only been around for a little while (since deregulation).

Just a thought !

 
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Reply: 3.1.1
From: Marina. L


"I better play the game as lending institutions like it"
This is what we have been doing with our bank manager. We have a number of Ips with her and we wanted another. We approached her with our plan and some figures,but as I have learnt she has no power even though she is a personal Banker. The "assessor" gives a yay or a nay and in our case he gave us a nay"

Anyway to cut a long story short I thought to myself who are these people to get in the way of my wealth creation so what I did was I approached her and asked her to give me a line of credit. She wanted to know was it for the properties, I said no it is just for an emergency and maybe some shares.(They make things so hard)
She and the assessor O.kd the line of credit.

I then went to another bank, using the LOC as my 20% and got the loan. I did not tell them about the LOC.
Sometimes the less they know the better. You do not have to divulge everything.

Marina.
 
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Reply: 3.1.2
From: Owen .


I've had the problem you have described. My bank takes LOC totals and also credit card credit into account when calculating what I can borrow. I've just reduced my LOC to it's minimum amount as I on;only have a very small debt left in it and am recalculating everything. I can always increase it again if I need to. It's just more paperwork for the bank.

Funny story. The last time this issue came up with them it was with my $8K credit card which is paid in full each month so always has a $0 balance. Even though my history showed this the bank still calculated me as having an $8K debt!!! So I asked my personal banker to cancel the card immediately. She forcefully resisted doing that. I then produced a letter I received the day before giving an $11K credit limit. I said I would just use this after I got the money I wanted and it had a big stamp on it saying "pre-approved"!!! So she finally agreed that the credit card didn't matter in the big scheme of things. Nothing ended up getting cancelled and I got my money. Bankers - Ha!!!
 
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Reply: 1.2
From: James Doherty


Use a deposit bond against your assets, the motto is use as little of your own money as possible, if you have been putting all your money in your own mortgage, that will not be difficult to do. You are better off looking for an off the plan property even one that is near completion. Try to negotiate at least 10-15% discount off contract price, if not attainable walk away and try another property as this will ensure your current mortgage keeps it's equity. If bank has allowed you 80%lvr of value then by the time project has completed the capital growth together with the discount obtained should ensure your 100% buy, deposit bond is returned and not used. Please try not to ask your accountant for advice unless he is a property expert, or find an accountant who understands the property market.
 
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Reply: 3.1.3
From: Grant A-Y


I have a $180k LOC on my house. I have purchased two IPs this way, setting up a sub account for each IP for about $33k. This includes 10% deposit and costs (inc Mortgage Insurance).

This way each IP is about 106% borrowed, with nothing down. Provided you buy IPs that increase in value things work out pretty well.

Each IP costs about $35 a week after the first year because for the first year in the ACT most IPs are cash flow positive after tax as the purchase costs (eg stamp duty) are deductable in the year of purchase.

Grant
 
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