Finding it hard to get finance

[MissHoney]

Hi SS investors,

I have a question/problem for anyone interested.

I am looking at an IP for 280K and the rental income is 17160pa. CF+! It's not the only property I am looking at. There is one other interstate about the same price (but CFneutral). I really want to secure two properties + in the next 3-6 months. Like many other investors, I see the present time as one of opportunity like no other (that I have been witness to at least).

I really want to borrow the whole amount but no bank seems to be interested in this. 80% is the max lend (ie 224K). At the moment the best rate I have is 4.996% fixed for 3 years. I need to come up with the shortfall of 56K plus extras. Stamp Duty costs for the 280K property above will be 13319 plus a bit extra for legals.

At present, I have 2 properties with one lender. They are fixed loans (and cross collateralised, but 1 title can soon be freed up...I think). I have prepaid all the interest for this present financial year so cash flow is pretty good.

Property 1 is worth about 160K and Property 2 is worth about 250K. There's about 80K equity. These are all rough guesses at the moment. Property 1 will shortly be getting some minor updating with new blinds and a split system. Property 2 (our PPOR) will be getting some major updating with 4th bedroom and external studio with extensive garden overhaul to hopefully bring value to 350-400K range.

My main problem seems to be one of pushing past the cash deposit issue. I really don't know how to move forward as the equity is not really enough for anything substantial. Hubby and I are saving most of our cash for the PPOR renovation which hopefully will produce equity for more purchases. I am very certain that we can service any loans because the properties will all be CF+ or close to it.

Can any one help point me in the right direction?

Many thanks for your input.

 

[Rolf Latham]

Hiya Miss H

80 % ................you may be able to get a 95 % or so lend depending on circumstances.

Run your circumstances past a good independent broker and see whats doable

ta
rolf

 

[Propertunity]

I really want to borrow the whole amount but no bank seems to be interested in this.

You did hear that there was a credit crunch on didn't you? Banks and their MI's are a bit too frightened atm by ppl who want deals like this

At the moment the best rate I have is 4.996% fixed for 3 years.

Just a word of caution here. I could be wrong, but when all this credit crunch GFC meltdown stuff is over, I think we'll be back into a rising IR environment again. You saw ppl getting caught earlier this year coming out of 5 year fixed rates of 6.5% into 9.5% IR and some were not able to cope with the near 50% increase in costs. I'd be looking for 5 - 10 year fixed rates if at all possible, next year when they bottom and just start to tick up a fraction..... 3 years might be too short.

My main problem seems to be one of pushing past the cash deposit issue.

"Your" main problem??? Miss Honey I think this problemn is almost everyone's main problem when it comes to buying more IPs. If any of us could overcome the upfront cash deposits issue when we've run out of other equity, then we'd all be out there buying more IP's instead of chatting on this forum

 

[Peter_Tersteeg]

By focusing on the lowest rate you may be excluding quite a few lenders who might be able to finance the property at a higher LVR. As Propertunity suggested, you may also find you're behind in the long run by fixing.

Can you shed some light on why the lender won't consider higher than an 80% LVR? I assume you're looking for a full doc loan?

 

[MissHoney]

By focusing on the lowest rate you may be excluding quite a few lenders who might be able to finance the property at a higher LVR. As Propertunity suggested, you may also find you're behind in the long run by fixing.

Can you shed some light on why the lender won't consider higher than an 80% LVR? I assume you're looking for a full doc loan?

Hi PT Bear and others,

Thanks for the responses. With this particular lender, over 80% and LMI applies. Don't want to pay LMI where possible. Yes to full doc loan if possible. Any suggestions for banks etc who will finance with higher LVR?

Thanks for all thoughts on the 3 yr fixed loan. I certainly am aware of the credit crunch, eye of the storm stuff, and the changed lending criteria. Nonetheless, I feel it is my time to push forward and accumulate property so long as they are close to CF+.

I guess what I'm looking for is a 100% loan that is variable, interest only. Then I can hope that rates come down a bit more so as to lock in a fantastic 10 yr rate.

By the way, what are people's thoughts on the rising IR in the next 5 years. I'm not up to date on this prediction.

Many thanks for your help.

 

[Lamingtons]

Hey, something else to remember is that the LMI on the IP is a tax deduction. Better to keep the money in your PPOR mortgage offset.

 

[Propertunity]

Nonetheless, I feel it is my time to push forward and accumulate property so long as they are close to CF+.

You'll get no argument from me in this regard MissHoney. I totally agree with the usual caveat of must have good CG prospects as well.

I guess what I'm looking for is a 100% loan that is variable, interest only.

Well without getting "creative" you might get close at 95% as PT_Bear says....but you'll still need 5% + SD etc. in the green folding stuff...... Over to the MB's now

 

[Qlds007]

Well you wont find any lender be prepared to waive the LMI upto 95% if thats what you are thinking however there are a couple of lenders that charge a fee instead to LMI which could work out cheaper.

 

[Peter_Tersteeg]

The reality is that if you go over 80% with any lender, you'll either pay LMI or an equivalent 'risk fee', so if you want to save more of your deposit your best option is simply to pay the LMI, claim the deduction and decide it's a cost of doing business.

The LMI premium can be added to the loan in most cases so it's not going to eat into your cash reserves. The larger loan will mean a higher repayment, but we're talking about around $5/mth.

At 90% LVR the cost of LMI is around 1% of the loan amount and at 95% LVR it's about 95% of the loan amount (each lender is different though). The few lenders that will allow 100% finance have LMI premiums around 3%. A few non bank lenders also have similar products to LMI which are cheaper for applicants that are eligible.

From a certain perspective, LMI is a cost of doing business which allows your existing money to go further, allowing you to purchase more IPs.

As for rates, I'd guess that they will drop further so fixing now might be a mistake. Trying to pick the lender who will have the best fixed rate six months in advance is impossible though as different lenders are constantly getting access to different sources of money for fixed rates, so the rate to the customer can be very different regardless of what a lenders past performance is like.

 

[asdf]

At the moment the best rate I have is 4.996% fixed for 3 years.

Hey Miss Honey, whos showing you that rate at the moment? The Westpac one expired before Xmas but its really 5.04% pa once you include the 15bps lock fee. Still not a bad rate really.

 

[BayView]

Hi SS investors,

I have a question/problem for anyone interested.

I am looking at an IP for 280K and the rental income is 17160pa. CF+! It's not the only property I am looking at. There is one other interstate about the same price (but CFneutral). I really want to secure two properties + in the next 3-6 months. Like many other investors, I see the present time as one of opportunity like no other (that I have been witness to at least).

I really want to borrow the whole amount but no bank seems to be interested in this. 80% is the max lend (ie 224K). At the moment the best rate I have is 4.996% fixed for 3 years. I need to come up with the shortfall of 56K plus extras. Stamp Duty costs for the 280K property above will be 13319 plus a bit extra for legals.

At present, I have 2 properties with one lender. They are fixed loans (and cross collateralised, but 1 title can soon be freed up...I think). I have prepaid all the interest for this present financial year so cash flow is pretty good.

Property 1 is worth about 160K and Property 2 is worth about 250K. There's about 80K equity. These are all rough guesses at the moment. Property 1 will shortly be getting some minor updating with new blinds and a split system. Property 2 (our PPOR) will be getting some major updating with 4th bedroom and external studio with extensive garden overhaul to hopefully bring value to 350-400K range.

My main problem seems to be one of pushing past the cash deposit issue. I really don't know how to move forward as the equity is not really enough for anything substantial. Hubby and I are saving most of our cash for the PPOR renovation which hopefully will produce equity for more purchases. I am very certain that we can service any loans because the properties will all be CF+ or close to it.

Can any one help point me in the right direction?

Many thanks for your input.

Just a quick beer coaster number crunch:

If you borrow the entire amount for this new deal, and add 5% for purchase costs, and manage to secure a 5% interest rate, your loan interest will be $14,700.

Allow 20% deduction off the rent to cover all outgoings and a possible vacancy or two.

Nett cashflow before any tax return is more like -$972 p/a.

Just letting you know.

You won't get a 100% lend without LMI off anyone, I suspect. So there's more neg cashflow.

You could possibly borrow the difference between the Bank and what you need, using a shorter term loan from someone like a solicitor, but say goodbye to a 5% interest rate.

 

[Perp]

Property 1 is worth about 160K and Property 2 is worth about 250K. There's about 80K equity.

As others have said, LMI is just a cost of doing business, and if you think now's a good buying opportunity (and I'm sure many agree), then I'd not be wanting to be prevented from buying for the sake of LMI - a one-off cost of 1-2%!

Sounds like you've got some available equity in your existing two properties. If you really want to leverage - and it sounds as though you do - then I'd be taking these two properties to max LVR (yes, paying LMI), then using the cash released from that to contribute deposits so that you can go to "a bit less than 100%" on your new purchases, which expands your potential lending pool considerably.

So your properties are worth $410K, borrowings $330K (I assume from $80K equity). You could refinance - eg WBC allow 95% plus capped LMI - and release 0.95*410 = $390K so $60K extra cash. That's a 10% deposit on another $600K of loans. (Though you could probably have done that math yourself )

And I agree with BayView that the IP you mention is not going to be CF+, but I take your point that it will be at least not heavily negatively geared.

 

[tarah]

Hi MissHoney,

Not sure if this helps but in Nov 08 I had a loan approved @ 85% lend no LMI with Westpac. I know that they offer 95% lends but you need to pay LMI. I went for the 95% lend but they would only approve my loan @ 85%!

I notice you are in Victoria but if you want my mortgage broker's details (she is in Adelaide and is great) PM me.

Hope this helps!
Good luck

Tarah

 

[Peter_Tersteeg]

The Westpac 85% no LMI product still exists, but it's now at a more expensive rate (you don't get the full 0.7% discount) as of about 1 month ago. There are better products available in the market now.

 

[asdf]

The Westpac 85% no LMI product still exists, but it's now at a more expensive rate (you don't get the full 0.7% discount) as of about 1 month ago. There are better products available in the market now.

Yeah they showed me only 40bps discount so now just relying on the economy to continue to be shi* to get me the massive discounts... So anyone find a 4.99% 3 year lender?

 

[Peter_Tersteeg]

Yeah they showed me only 40bps discount so now just relying on the economy to continue to be shi* to get me the massive discounts... So anyone find a 4.99% 3 year lender?

I think if you do the math, you'll find that you're probably better off paying the LMI and getting the full discount

From memory Westpac locks you into the variable products for a particular timeframe, you may not be able to get a fixed rate.

 

[sue78]

Property 1 is worth about 160K and Property 2 is worth about 250K. There's about 80K equity. These are all rough guesses at the moment. Property 1 will shortly be getting some minor updating with new blinds and a split system. Property 2 (our PPOR) will be getting some major updating with 4th bedroom and external studio with extensive garden overhaul to hopefully bring value to 350-400K range.

the $80k equity is 20% of the total value of the properties so technically you don't have any extra equity. Your LVR is maxed out already. Given the current climate, I don't think any of the traditional banks will lend to you. Even on a cashflow neutral property, youw ill still have to show the potential to repay the loan so after the mortgage on PPOR, first IP, how much do you have left for 2 more IPs?

Sorry if I am being negative but just trying to show you where the banks are coming from. The fact that interest has been prepaid doesn't matter...that's not what they look at unfortunately.

Your option would be to 1) increase income, 2) renovate yourhouse an dhope that it goes up in value 3) go for a loan with 5 different banks...you never know, one of them may re-value your properties a lot more than another one 4) buy an Ip that the bank values as more than the market giving you instant 20% (my step bro recently bought a $800k apt thatBank of QLD valued at $1.3mil!) 5) rent your ppor outand move home giving you immediate cash flow for 95% lend.

The LVR is a problem for everyone and why property investing can be very slow. It has been good in the lastfew years coz prices rised quickly so people could keep buying. I don't have this problem coz I create my own instantequity through building house + land...tat's the only way I can guarantee myself an IP or 2 each year.

 

[sue78]

just wanted to add that in hindsight, what you should have done was paid down your loans rather than prepay interest which would have created extra equity but even then that wouldn't be enough. You need about $100k for 20% deposit on 2 IPs.

 

[Rolf Latham]

On the Ground, many lenders do look at prepaid interest as a bad thing where the deal is tight in other areas, since it doesnt show that the loan has been paid from income....................it can be a red flag for LOE for many of them and we have had loans declined where we couldnt prove that the prepayment came from "income"

ta
rolf

 

[Token Funder]

On the Ground, many lenders do look at prepaid interest as a bad thing where the deal is tight in other areas, since it doesnt show that the loan has been paid from income....................it can be a red flag for LOE for many of them and we have had loans declined where we couldnt prove that the prepayment came from "income"

ta
rolf

What Rolf said.