First time Investment Property purchaser needing advice with finance.

[A&P]

Hi All,

Hubby and I are new to investing and are looking at purchasing an investment property. We actually have found one and are signing the contract tonight so need advice real fast.

Our place of residence is valued at $700,000 and we have a loan of $255,000 on it with a cash back amount of $25,000 which we can access.

The investment property purchase price is $315,000. We were hoping to only outlay the minimal as possible from our pockets and finance the largest amount possible. In saying that can we just pay 5% deposit which would come out of our cash back facility then borrow 95% plus stamp duty and extra purchase costs including legal fees. I understand that we will have to pay mortgage insurance also. Can anyone give am an idea as to how much the MI would be? and can MI be added on to the loan also?

Is this the best way to finance the loan without tying up our house in it as we are looking at selling and moving on in the next year or so. So would prefer not to have our house tied up with the investment property in any way.

Your advice would be very much appreciated, but please keep it simple as we are a tad challenged with all the jargon on this site lol.

Thanks in advance,
A&R

 

[alexlee]

If you don't want to, you don't have to pay lenders mortgage insurance at all. Refinance the PPOR. Use the proceeds to pay for 20% + costs. Then borrow 80% against the investment property. Nothing out of your pocket at all, the total loan amount is the same and you don't pay LMI.

 

[charlieandkath]

If you don't want to, you don't have to pay lenders mortgage insurance at all. Refinance the PPOR. Use the proceeds to pay for 20% + costs. Then borrow 80% against the investment property. Nothing out of your pocket at all, the total loan amount is the same and you don't pay LMI.

Would back the above post.

 

[A&P]

OK so you are saying we should refinance our ppor by the amount we owe plus add 20% more to this amount (current balance plus deposit for investment property) to pay for the deposit on the investment property. So that would make our ppor mortgage payments higher as the loan size would have increased which would make the investment property loan decrease as it would only be for 80% of purchase price. Am i understanding this correctly?

Only problem with that is I think that then with the rent return on the investment property it would almost be positively or very close to geared.

Am i understanding this correctly ?

 

[Peter_Tersteeg]

If you structure the loans properly, you won't need to worry about +ve vs. -ve gearing.

On one has you have a larger deposit (borrowed against your home), but the loan against the new investment is smaller. The alternative is you have a smaller deposit and get a bigger loan against the investment. In both cases the total borrowing is the same and all of the money your borrow for the investment is tax deductable, regardless of which property it's secured against. It's the purpose of the borrowing that counts, not where it comes from.

What you need to do is to structure the borrowing properly to ensure the money you borrow for the deposit is tax deductable as well the loan on the investment property.

You should not simply increase your existing mortgage to find the deposit, but you should get a second loan account against your home to fund the deposit.

I'd suggest you call a mortgage broker whos an investment property specalist to help you get your structuring right.

 

[A&P]

Ok, so i think i understand now. Thankyou by the way.

So we essentially need 3 loans. One for our ppr, one for the deposit on investment property (secured by our ppr) and the last one for the balance on the investment property. ?

Also I guess I would be right in saying we SHOULDN'T use our cash back facility on our ppof for the deposit either.

I have since spoken to Mortgage Choice brokers and they have ran a few scenarios by me and they suggested using all our cash back for the deposit which i don't really want to do. (happy to use enough to cover the 5% deposit but no more). This would make it positively geared though so not a good idea as we couldn't claim the interest on the cash back amount if we put that in either.

Mortgage Choice brokers don't use our lender which is Greater Building Society so looks like we might be best to just go and see them and see if they can do something for us.

So stressful.....lol.

 

[Peter_Tersteeg]

Also I guess I would be right in saying we SHOULDN'T use our cash back facility on our ppof for the deposit either.

Correct.

I have since spoken to Mortgage Choice brokers and they have ran a few scenarios by me and they suggested using all our cash back for the deposit which i don't really want to do. (happy to use enough to cover the 5% deposit but no more). This would make it positively geared though so not a good idea as we couldn't claim the interest on the cash back amount if we put that in either.

If this is the best advice they have, walk away from them. They're giving you bad advice and don't really know how to structure investment loans. Most of the regular brokers posting on this forum will be able to give you a lot more suitable advice.

 

[A&P]

I have decided to go and speak with our bank (Greater Building Society) and see what they can do.

Does anyone know, if we borrow the 20% deposit for the Investment Property using our home equity what happens if we sell our home which we are likely to do in the next 12 months. Would this 20% loan need to be paid out? Or is there a certain type of loan we should get to avoid this?

Thanks again. A&P

 

[Rolf Latham]

I have since spoken to Mortgage Choice brokers and they have ran a few scenarios by me and they suggested using all our cash back for the deposit

Im sure there is a good reason why someone would suggest you spend your tax paid cash buffer................

ta
rolf

 

[The Sniffer]

I have decided to go and speak with our bank (Greater Building Society) and see what they can do.

Does anyone know, if we borrow the 20% deposit for the IP using our home equity what happens if we sell our home which we are likely to do in the next 12 months. Would this 20% loan need to be paid out? Or is there a certain type of loan we should get to avoid this?

Thanks again. A&P

Depending when you buy the new home there is generally 3 options:

1. Settle on the purchase of your new home before the sale of your existing home . In which case you may need a loan for 100% of your new home (maybe more or less). CALL THIS LOAN 4.
When your current home sells repay loan 4 (home loan) and transfer loan 2 (the 20% plus costs for the IP) to the new property. To achieve this your will need either a loan that is 'portable' or re-write the 20% IP loan to settle in conjunction with th new purchase. All major banks have portable loans and so do many non bank lenders.

2. Settlements happen same day. Usually when this happens the banks will settle your sale at say 10am. And those funds / cheques collected can be held by the bank to use for to your new purhase (might settle a couple of hours later).

Same as option 2 in terms of transferring the 20% plus costs to be secured against the new home.

3. The final option is that you sell first. And buy later (might be a week between settlements). If this happens you keep your 20% plus costs for the IL as a loan however place an equal amount of funds in Term Depoist with the same lender. This means the 20% plus costs is now secured by the TD rather than your home. When you buy a new home you can switch the security from the TD back to the new home which will allow the TD funds to be released for the new purchase.

The 4th option which in my opinion should be avoided. Is that you sell the house and repay the 20% plus costs IP loan. This will mean you have less cash and may need to borrow for your new PPOR.

Might sound complicated but the guys in settlement will have this happening every week (in the banks). A smaller non bank or securitized lender might struggle withthe settlement process; or charge fees for each part of the process.

I've generally been able to do any of the above structures with no extra bank fees using 1 or 2 of the majors. For them it is as simply as a settlement and switch.

 

[Marty McDonald]

Assuming you plan to buy a new ppr you could also consider chosing a loan that is portable for the deposit loan so that it can be transferred to your new ppr thus keeping it going as a tax deductible debt rather than paying it out when you sell. Alternatively if you settle on your new ppr first you could put in place an additional loan equal or greater than the deposit loan so you can effectively refinance that debt ie pay out the deposit loan with the new loan. Just small details that your local building society no offence would be unlikly to bring to your attention / understand.

 

[A&P]

Thankyou all for your replies. i'm off to the bank today armed with all your very helpful info and fingers crossed we can sort this all out and sign the contract today.

That is after we decide which property we will buy after finding another one yesterday. grrrrrrr decisions decisions!

 

[A&P]

Just wanted to say thanks again for all your help in answering my question. Went to our bank today and had our loan approved. Using our house as security on a 20% purchase price and the balance in another seperate loan. Very easy indeed. Oh and when we do sell our ppor which will be used as security on one of the new loans we only have to pay $300 to have the security property changed over to show the new property details. Very happy about that.

Easy Peezy