First investment property

[namesymot]

Hi everyone,

Am a long time reader of the forum and first time poster. Looking for some info and advice on purchasing my first investment property. Here are some main points:

1. Got an offer ($660k) for a house accepted last Friday. Location is in a good neighborhood with good schools (one of the primary reason for my wife and I). We have been looking around the area for over a year and finally found one that ticks all our boxes. The investment property will be under my name for now as we're a single income family.

2. We plan to rent out the property for at least a couple of years and move in when our eldest kid is ready for primary school. We will then switch our PPOR to be our investment property. PPOR is in a good location near CBD and we felt there is value in holding the property for long term investment.

3. We currently owe about $327k on our PPOR, with equity built up to about $85k. The PPOR loan is variable rate 6.14%. We plan to withdraw the equity to make up for the 20% deposit required for the investment property. We also have cash in hand of $130k that we will use to cover the deposit and other related purchasing costs.

Questions we do have:

1. Our plan is to borrow up to the limit where LMI is not required (80 or 85%, depending on the loan product). The best variable rate I've found on the market is 6.29% by Bankwest (Online Home Loan, appreciate if anyone have any experience with applying for that home loan).
On the fixed rate side, I've also found Vplus (www.vplus.com.au), formerly Better Options homeloan, offering the cheapest 3 yr fixed rate of 5.65%, but it seems to me that this is too good to be true! (again would appreciate if anyone have had good/bad experience to share on that lender).

2. We're debating whether to hedge our risk and apply for the above 3 yr fixed rate loan or just take the ride with the variable rate loan. We're a little concerned with our monthly cashflow (as we're operating on a single income, paying two mortgages will be a challenge) once we have that property in our hands. So paying even a little less mortgage is an attractive option for us.

3. The choice of interest only or Principal & Interest loan. As we will be renting out the property for a couple of years, we're also considering the benefits (whether there are any) of interest only loan. What would be the benefits of having interest only loan for an investor with primary income from full-time employment?

4. Tax implications of turning our PPOR into investment property down the road and whether the equity we've withdrawn from it can still be tax deductible. We're already in the process of finding ourselves a tax accountant to help with the taxation side of things.

Would appreciate any inputs from the folks here. Thanks.

 

[Aaron_C]

1. Personally I don't like fixed rates because you have no idea what is going to happen to your circumstances in the next 3 years. If you ever need to sell/refinance you may incur huge break fees that are well in excess of what you save. The variable rate looks pretty good. Why are you trying to avoid LMI anyway? It's not the big bad monster....it helps you preserve valuable cash that you can use for other things/safety buffer.

2. As above.

3. Interest-only with offset account attached. P&I is not good for investment or PPOR compared to this option. This will preserve the tax deductibility of your loan if you choose to rent it out while giving you freedom to use your cash for whatever you want. With redraw you have to be very careful about where the money goes and it can have disastrous implications if it isn't accounted for properly.

4. As above.

 

[Rolf Latham]

3. We currently owe about $327k on our PPOR, with equity built up to about $85k. The PPOR loan is variable rate 6.14%. We plan to withdraw the equity to make up for the 20% deposit required for the investment property. We also have cash in hand of $130k that we will use to cover the deposit and other related purchasing costs.

Hi

Welcome to the forum

One thing I would strongly suggest is that you look at goals and expectations first, structure second , product mix and lender third, and interest rate last............weird I know, media doesnt teach us about the first 2 so we tend to focus on the last 2 which are the least most influential in building our wealth.



We dont know what your current PPOR is worth, nor do we know what tax bracket you are in so I will make some general suggestions which may or may not apply.

1. STOP paying principal on your PPOR loan now. Convert to an IO loan with Interest only at 372 k on Monday. Connect an offset account to the new IO PPOR loan and place any principal payments into that offset account. While 6.14 is a great rate, the loss of 85 k worth of interest tax deduction is worth a bunch more than that rate over time, but its too late to fix that now. Id take a punt that the lack of pro active structure from ur lender or broker means that you will be or are paying an effective rate exceeding 7 % in todays terms

2. Do NOT withdraw the 85 k from your PPOR loan. Place a separate 85 k IO loan over the 327 k loan you have now. Im assuming you have valued the place and its worth approx. 530 k ? If u initially paid Lenders mortgage insurance on the loan, then its possible we can take more than 85 k out as equity for a moderate LMI premium increase. This may serve you well.


3. Some of your questions suggest that you have some more soul searching to do. WHile you have your PPOR, one would rarely consider a PI loan for the new property, especially as u have indicated that it will b a struggle for you to make the payments . IO all the way for any IP while u have a non deductible debt, There would be very very rare cases where PI would make any sense.

4. If u believe the servicing will be a challenge on the one income, dont assume that any lender will want to take on your new loan.............be proactive with that and get the servicing calculator for lender X and find out how it works, and what rules apply to that lender, and make sure your numbers work, before committing to mark your credit file with an application.

5. Depending on a bunch of things, you may want to look at actually going for a 90 % lend with LMI on the new place if the serviceability allows. The 130 k cash you have should stay in offset against your PPOR debt, and not be diverted to the IP simply to save a few bucks in LMI Premium.......the interest saved on the PPOR will possibly ( likely) more than make up for the depreciable LMI premium

6. Finally, be aware that your existing lender may have some rules on "cash out" that will make your plans more difficult than really should be.

ta
rolf

 

[namesymot]

Thanks, Rolf. Some very interesting suggestions there.

To add a few things, the loan on my PPOR was only refinanced last September, after coming out of 3 yr fixed interest term. My wife and I didn't spend enough time looking at possibly restructuring the loan (part of having 2 young kids to care for on day-to-day basis). We simply went for the cheapest variable interest rate on the market just for the sake of it.

When the PPOR loan was refinanced, we borrowed back up to 80% of the property value, leaving the equity in the loan to reduce the interest, while we continue searching for our first IP. Unfortunately, this loan product (one of the popular online homeloan) doesn't offer an offset account to begin with. The lender does offer unlimited redraw without any costs to balance things out a bit.

I can see your point about preserving the $85k for future tax deduction purposes but still struggling to follow your point 1 and 2. If you don't mind, can you shed more lights whether my interpretations below are correct.

1. Switch PPOR loan to IO loan. Since the loan was refinanced recently, can it be done with the same lender or do I need to change lender again? Current lender does offer IO loan, but not sure whether I will be allowed to switch without any penalties.

2. Split the $85k equity to another IO loan. Again, the lender does offer possibility of multiple split loans but not sure whether I will be allowed to split the loan now.

I'm simply a bit hesitant about doing another refinancing. Our approach with homeloan and borrowings have been very conventional (we simply don't like having huge debts) so didn't look much into loan structure carefully. But if refinancing is the only way to set ourselves (and our kids after us) into the right path for wealth creation, then that's the bullet I'm willing to bite. Would have to sell the whole thing about refinancing again to the missus though!

1. STOP paying principal on your PPOR loan now. Convert to an IO loan with Interest only at 372 k on Monday. Connect an offset account to the new IO PPOR loan and place any principal payments into that offset account. While 6.14 is a great rate, the loss of 85 k worth of interest tax deduction is worth a bunch more than that rate over time, but its too late to fix that now. Id take a punt that the lack of pro active structure from ur lender or broker means that you will be or are paying an effective rate exceeding 7 % in todays terms

2. Do NOT withdraw the 85 k from your PPOR loan. Place a separate 85 k IO loan over the 327 k loan you have now. Im assuming you have valued the place and its worth approx. 530 k ? If u initially paid Lenders mortgage insurance on the loan, then its possible we can take more than 85 k out as equity for a moderate LMI premium increase. This may serve you well.

ta
rolf

 

[Bbbls]

Hi

4. If u believe the servicing will be a challenge on the one income, dont assume that any lender will want to take on your new loan.............be proactive with that and get the servicing calculator for lender X and find out how it works, and what rules apply to that lender, and make sure your numbers work, before committing to mark your credit file with an application.

I'm pretty curious of how an individual would get access to play with such a calculator from a lender. Or is this just their general online borrowing capacity calculators that are very vague and optimistic?

Cheers

 

[Rolf Latham]

I'm pretty curious of how an individual would get access to play with such a calculator from a lender. Or is this just their general online borrowing capacity calculators that are very vague and optimistic?

Cheers

brokers use these on a daily basis.

Lenders direct are a bit cagey to hand these out because they are only ONE of many reasons a loan may or may not be approved, and they dont want to get into discussions on this.

WHere I have clients that are number and detail oriented, we tend to work through the calcs with them, especially where we need to show them how the structured / planned financing process can provide for 2 x more lending capacity than throwing "mud at the wall".

Most investors and aspiring invesstors choose lenders for the entirley WRONG reasons, and apply Ma n Pa loan idealogy.

A ma n pa home loan serves a different purpuse to someone thats looking to build a portfolio. Sorry I digress.


ta
rolf

 

[Rolf Latham]

Thanks, Rolf. Some very interesting suggestions there.

To add a few things, the loan on my PPOR was only refinanced last September, after coming out of 3 yr fixed interest term. My wife and I didn't spend enough time looking at possibly restructuring the loan (part of having 2 young kids to care for on day-to-day basis). We simply went for the cheapest variable interest rate on the market just for the sake of it.

When the PPOR loan was refinanced, we borrowed back up to 80% of the property value, leaving the equity in the loan to reduce the interest, while we continue searching for our first IP. Unfortunately, this loan product (one of the popular online homeloan) doesn't offer an offset account to begin with. The lender does offer unlimited redraw without any costs to balance things out a bit.

I can see your point about preserving the $85k for future tax deduction purposes but still struggling to follow your point 1 and 2. If you don't mind, can you shed more lights whether my interpretations below are correct.

1. Switch PPOR loan to IO loan. Since the loan was refinanced recently, can it be done with the same lender or do I need to change lender again? Current lender does offer IO loan, but not sure whether I will be allowed to switch without any penalties.

2. Split the $85k equity to another IO loan. Again, the lender does offer possibility of multiple split loans but not sure whether I will be allowed to split the loan now.

I'm simply a bit hesitant about doing another refinancing. Our approach with homeloan and borrowings have been very conventional (we simply don't like having huge debts) so didn't look much into loan structure carefully. But if refinancing is the only way to set ourselves (and our kids after us) into the right path for wealth creation, then that's the bullet I'm willing to bite. Would have to sell the whole thing about refinancing again to the missus though!

Hiya

Without knowing who the lender is its hard to gauge what they may or may not allow.

Smells like U bank

In addition, you have stated the lender doesnt allow an offset..........clearly this does look like an important tool for you, and could have been from the very first day that we have moved into the property

If the current lender did a proper Client Needs Analysis, and you told them what you wanted to do with the property middle term, they should not have taken the business in the first place.

The product is NOT fit for purpose from the limited information we have.

Of course, your circumstances may have changed heaps since u took the loan.

Maybe we can help further, once we can confirm lender pls

ta
rolf

 

[namesymot]

Indeed, it is Ubank. The 'force' is strong with you, Rolf!

 

[wobbycarly]

*snip*
Maybe we can help further, once we can confirm lender pls

ta
rolf

Indeed, it is Ubank. The 'force' is strong with you, Rolf!

Without wanting to stick my nose in, may I suggest you get in touch with Rolf directly and let him broker for you? A good broker (or a great one as I understand Rolf to be) will save you time, money and aggravation!

 

[BMan]

Without wanting to stick my nose in, may I suggest you get in touch with Rolf directly and let him broker for you? A good broker (or a great one as I understand Rolf to be) will save you time, money and aggravation!

+1
they can only do so much for you on the forums
if you go through them its a win win for both of you

 

[Rolf Latham]

Indeed, it is Ubank. The 'force' is strong with you, Rolf!

U bank will do the split and the IO, but you need to forgoe the offset.........

I guess ur 130 000 cash is in ur partners name in some form of online high rate savings acct ?

ta
rolf

 

[namesymot]

Rolf, will drop you an email offline to discuss further.

 

[Bbbls]

brokers use these on a daily basis.

Make your job hard without

Lenders direct are a bit cagey to hand these out because they are only ONE of many reasons a loan may or may not be approved, and they dont want to get into discussions on this.

Amongst most of their credit policy. It certainly makes it hard though for an individual to work out what's going to work above and beyond simple rate and brand comparisons...

WHere I have clients that are number and detail oriented, we tend to work through the calcs with them, especially where we need to show them how the structured / planned financing process can provide for 2 x more lending capacity than throwing "mud at the wall".

This has been my and my partner's issue. Feels like mud slinging is all that's left even though we have a pretty good picture of what we want to do with our finances (though same time probably overlooking stuff that hasn't occurred to us! ), but structure wise... it's hard to know if something is going to work till you're already started digging (from our perspective) I'm mean I was kinda resorting to what's going to fit cost effectively for the first few years, to blow the savings restructuring when limits are found... felt very stupid.

Thanks!