funding IP 2

[doozer]

Howdy,
My query has four parts:
1. We have an IP renting at $150p/w on a I/O loan. We owe $56700 on it & it's worth approx. $105k. We are currently renting ourselves paying $130p/w. Our current lender does not allow add. repayments on the I/O loan. Is there any benefit in add. repayments for I/O's??

2. Our current lender also does not have LOC facilities (although they have a ripper interest rate!). How do we structure our finances to purchase IP no.2? Assuming no cash down.

3. How do we keep our current lender for IP 1 whilst still using equity to purchase IP 2 with perhaps another Lender? ie so we don't cross collaterise. ANZ Home Loan Manager did not know what i meant when I said I did not want to x-collat.!!

3. Who are the best Lenders/Brokers that will talk simple terms & basically do most of the work for us without displaying their vested interests??

 

[Diamondo]

Doozer,

A bit more information...

Purchase price of IP2?

Are you OK about paying LMI on both loans (to avoid cross-collateralizing IP2) if needs be?

 

[Rolf Latham]

Hiya

To the current list of questions I would like to add:

1. Do you have a home loan, if so how much is it for ?

2. Why so keen to stick with a lender that has no flex in the product ?

3. You asked .........Who are the best Lenders/Brokers that will talk simple terms & basically do most of the work for us without displaying their vested interests??

In terms of lenders well you know the answer there. If you have a blue tie to sell you sell the blue tie. Brokers generally have a greater scope of product access. Try using an indepenent broker, look at www.yourmortgage for a checklist of what you should be asking for.

Ta

rolf

 

[Diamondo]

Doozer,

Got some spare time on my hands so I had a go at answering your questions in some detail...

Q 1. Most clued-up investors want to reduce non-deductible debt whenever they can - so typically they will pay down their owner-occupied /personal loans first. But paying down investment (deductible) debt first rather than consumer debt, will reduce their opportunity to claim tax deductions for investment debt interest, and therefore the opportunity to pay less tax. Not useful.

In your case however, if you have no large consumer debt (an o/o loan) and if you have the income to make additional payments, you can choose to reduce your investment debt and owe the bank less. That is, concentrate on debt-reduction rather than the secondary benefit of getting a tax deduction.
Your loan which will not allow additional payments doesn't give you this option.
Does the restriction on extra repayments extend for the length of the loan, or for an initial period of years? If the restriction applies for the life of the loan (unusual), then re-financing this loan would be a good move - and irrespective of whether you go ahead with IP 2 or not.

I suppose the Golden Rule is: if you have any debt, pay it off, but if you have consumer debt, pay it off first and then attack investment debt. Ensure you have a loan that gives you this option.

Q 2 and 3. You are aware that the opportunity to use your preferred loan structure (non cross-collat'ised) depends on you having the sum needed for the deposit, LMI and Stamp Duty.

Assuming you can't re-draw this amount from your current IP 1 loan, and assuming your income has been assessed as OK (you have had it confirmed that you can service future IP 1 and 1P 2 loans), you should be able to get a LOC on the remaining equity of IP 1 with another lender. If you do this, your LOC should allow around $35K, depending on the lender.

So going this way you would:
1. Retain your current lender with IP 1
2. Get a LOC with another lender (this should allow $35K)
3. Use this LOC for deposit, to obtain loan for IP 2

However, a more effective approach would be the simpler option of re-financing IP 1 and using the equity for the deposit etc. for IP 2. You would:

1. Re-finance IP 1 (say goodbye to current lender) to 90-95% LVR with a loan which offers the flexible features you need
2. Use the equity (money!) from the new IP 1 loan to fund the deposit and other borrowing costs needed for IP 2.
3. Consider using different lenders for IP 1 and IP 2. That's another story but worth working through.

Q4. Get talking to as many brokers as you can and make it clear that you need to spend time going through your options - few will take the time out to sit down with you and ensure that you understand the structuring options you have. Why? The cross-collateralise option is usually less work for the broker and more easily processed by lenders. This is despite the fact that there is perhaps more business (more loans) for brokers in individually-secured investment properties.

Anyway, hope this helps.

 

[Rolf Latham]

Hi Dman

Agree generally with most of your views but must take you up on talk to as many brokers as you can. For sure NOT the way to go.

If one wants to do that amount of work, go to lenders direct where the staff get paid a salary to work.

With a broker the advice I have is look till the intuiton tells you, yep, this is one of my partners to help me to my financial freedom.

If you keep digging you will only find confusion in a myriad of structures and products, and disgruntled but great brokers - trust the gut feel.

ta

rolf

 

[Jas]

I agree with what Rolf said - mortgage brokers only get paid for doing loans, not financial planning.

BTW Dman, where's the security for the 35K LOC from the second place? Whoever lends it will be going down as second mortgagee - not something they like...

Jas

 

[doozer]

funding IP2

Firstly thank you to the repliers.

Secondly, in answer to your questions Rolf, yes we still have a home loan on IP1 for $56500 and no we don't have any other personal debt.

Diamondo, thanks for your detailed repsonse. I gather from your initial reply that you are saying there is little point paying more than I have to on the I/O only loan?

We haven't found IP2 yet, at this stage I'm just making sure I know how to structure the loans etc when it comes to signing on the dotted line.

All in all it appears we need to refinance to obtain some flexibility. Is anyone willing to stick their neck out and throw some Lenders names around that might suit my purpose??

 

[Rolf Latham]

Hiya

For small volume LOCs Heritage Building Society is not bad.

Dont throw the baby out with the bathwater just yet though.

You may be able to stay with your exist lender. An interest only term loan with either an offset facility or redraw during the I/O period may do the job too.

Many of the small mortgage managers wont generally do sub 50 k loans.

Ta

rolf