How to finance next IP purchase

[dajackal]

Hi there,

I'm wondering how I can finance my next IP purchase. I want to minimise the use of my own capital as this is currently used to offset my PPOR.

I've got some spare equity in an existing IP I want to tap into.

Do I:
a) Increase my existing loan
b) Set up a Line of Credit
c) Other???

Problem with line of credit is that CBA charges an additional 0.15% on top of their variable rates. How do split loans work?

Then for the new IP loan, is the LMI fee for 90% LVR justified? Or should I shop around for lenders that do 85% LVR no LMI?

Much appreciate any advice you can offer

 

[Shahin_Afarin]

Couple of points:

1. Only Citibank will do no LMI up to 85% LVR but you need to fit certain conditions

2. LMI on the IP is tax deductible for the first 5 years.

3. LMI for loans over 90% LVR increases drastically

4. You can potentially draw upon the equity from your existing property to fund for the next purchase but it needs to be structured properly for many reasons.

Now what is your current loan amount and the approx value of your PPOR?

Regards

Shahin

 

[Peter_Tersteeg]

The cost effective rate option is somewhere between a line of credit and other.

You can also access your equity using a run of the mill interest only variable investment loan. As you've noted it's cheaper than the CBA LOC and for all intensive purposes it addresses the problem just as well.

85% no LMI deals are pretty hard to find these days. My personal view is that it's worth paying LMI to 90%, but not very cost effective beyond that LVR.

 

[dajackal]

You can potentially draw upon the equity from your existing property to fund for the next purchase but it needs to be structured properly for many reasons.

I've got an existing IO variable rate investment loan with CBA with about 70% LVR, hoping to take it up to 80% to help with the purchasing costs of the new IP.

From what I can tell from the CBA website my options are either to increase my existing loan or take out a new line of credit. Are there any tax deduction issues if I increase my existing loan, because the one loan will now be used for two different purposes? I couldn't see any option for a split loan.

My personal view is that it's worth paying LMI to 90%, but not very cost effective beyond that LVR.

Cheers, that makes sense. That way I won't need to dip into my own funds as much. I'm currently paying 5.4% variable for my loans with CBA, does it pay to shop around or not enough difference to warrant the hassles with dealing with another lender?

 

[dajackal]

Now what is your current loan amount and the approx value of your PPOR?

I recently refinanced PPOR at 80% LVR so nothing there to play with. I do however, have a large amount sitting in the offset account, as there is a good chance I'll rent it out at some point in the future.

But I'm not sure if I want to pay it down and reborrow against it, for the sleep at night factor.

I don't mind borrowing against the equity in an IP if it is as a result from CG.

 

[Peter_Tersteeg]

But I'm not sure if I want to pay it down and reborrow against it, for the sleep at night factor.

That's likely to be the most effective strategy, especially from a tax point of view, but I agree the sleep at night factor is important.

 

[Terry_w]

Are there any tax deduction issues if I increase my existing loan, because the one loan will now be used for two different purposes? I couldn't see any option for a split loan.

Yes, big issues. This is best avoided as it will result in less tax claimable.

 

[Rolf Latham]

Problem with line of credit is that CBA charges an additional 0.15% on top of their variable rates. How do split loans work?

Then for the new IP loan, is the LMI fee for 90% LVR justified? Or should I shop around for lenders that do 85% LVR no LMI?

Hi DJ

You can accep what im going to say as a concept, or you can say nah, that doesnt suit me.

On a more global view ( your long term goals..........) I would expect if you laid out your property goals, and worked backwards to a financing plan, the questions you would be asking would be more structurally based, and the $ vs what value am I getting questions would no longer exist.

Perspective

.15 for 100 k of LOC is 150 a year


LMI premiums transfer risk from you to a mortgage insurer. I know that you are told LMI isnt to your benefit, the policy protects the lender. Well, the reality is that you get a fair slab of benefit as well.

Whn you have that extra 8 to 10 % buffer, instead of 2/3rdsof bugger all to save on a deductible LMI premium, folks sleep better at night

ta

rolf

 

[Aaron_C]

No need for a 'line of credit' per se as it is the same as a normal term loan but is pricier and has higher risk of recall.