How to structure loans and why

[imonmyway]

I am about to purchase a my first IP and would like some advice on loan structuring

My PPOR is valued at 450k and we owe 283k on it

IP is 287k but will also need to borrow all the costs so total is about 302k

Should get about $270 pw rent for it

I am on 90k and partner is on 65k

I understand the cross collateralisation thing and that you should have separate loans for each IP but I see people in here talking about getting separate loans to pay deposit and costs I don't quite understand the reason for this.

Hope this question isnt to broad

 

[thedude]

Hi,

LMI. Loan Mortgage Insurance is an expense you generally pay if you are borrowing over 80% of the property value.

So, in your case if you are borrowing 100% plus costs from the one lender youre obviously going to pay LMI.

To avoid paying LMI most investors find their deposit from alternative sources: such as cash deposit or funds borrowed from another bank via a LOC.

So in your case if you were to try and avoid LMI, you would borrow 20% of your new IP plus costs from your current lender via the equity you have via a LOC.

Then go to another lender asking for the remaining 80% of the property value which avoids paying LMI.

Once you have settled then it would be a good idea to convert the 20% outstanding on the LOC to a cheaper loan with the original lender.

Sorry if this is confusing, Im not that good at explaining these things, however there are tons of threads on this topic. Search for "Avoid LMI" or LMI.

 

[Peter_Tersteeg]

The following thread deals with the same problem and describes an appropirate solution. Avoid cross collateralisation if you can.

http://www.somersoft.com/forums/showthread.php?t=38562

 

[imonmyway]

thanks dude and bear,

If i get a LOC loan does that effect my overall LVR by reducing the equity in my PPOR when I go for loans on other IPs?

 

[thedude]

Hi Imonmyway,

Yes, it will reduce your LVR as you are taking out another loan.

Althought i hate to generalise, but basically, what a lot of investors do on SS is use equity built up to fund deposits among other uses.

So say you have 100K in equity on a house worth 300K which you can use to fund IP deposits.
You find an IP for 200K you wish to buy.
You use your equity to fund the 20% deposit required for the new IP to avoid LMI, which would be 40K plus costs of say 10K (rough figures for example)

So your overall equity reduces by 50K down to 50K.

So you have 50K equity to use for your next IP deposit and costs.

So you could potentially purchase another 200K IP as above whilst avoiding paying LMI. As long as you can service the debt, which by the looks you'll have no problem all looks good.

 

[Bradsdad]

Hi,

LMI. Loan Mortgage Insurance is an expense you generally pay if you are borrowing over 80% of the property value.

So, in your case if you are borrowing 100% plus costs from the one lender youre obviously going to pay LMI.

To avoid paying LMI most investors find their deposit from alternative sources: such as cash deposit or funds borrowed from another bank via a LOC.

So in your case if you were to try and avoid LMI, you would borrow 20% of your new IP plus costs from your current lender via the equity you have via a LOC.

Then go to another lender asking for the remaining 80% of the property value which avoids paying LMI.

Once you have settled then it would be a good idea to convert the 20% outstanding on the LOC to a cheaper loan with the original lender.
Sorry if this is confusing, Im not that good at explaining these things, however there are tons of threads on this topic. Search for "Avoid LMI" or LMI.

And pay more application/approval fees? Wouldn't it be better to get an AIP or even formal approval for the cheaper loan 1st if you were going to convert it. Then just draw down the loan when required.

As this is 1st IP and there would still be room to move a seperate lender wouldn't be absolutely necessary. Maybe on the next IP this would have greater benifit.


As usual this is just my 2 bobs worth and that's maybe all it's worth with the info to hand.

 

[thedude]

And pay more application/approval fees? Wouldn't it be better to get an AIP or even formal approval for the cheaper loan 1st if you were going to convert it. Then just draw down the loan when required.

As this is 1st IP and there would still be room to move a seperate lender wouldn't be absolutely necessary. Maybe on the next IP this would have greater benifit.


As usual this is just my 2 bobs worth and that's maybe all it's worth with the info to hand.

The seperate lender was suggested as a method to avoid paying LMI on the IP. It also avoids x-col at the same time.

The LOC was suggested so it is ready and waiting and no need for messing about with application and waiting on the bank whilst your trying to make a deal. Essentially just reducing a point of failure of the deal. You could do the same with a pre-approval I guess, however its not the same as having the money in your hand via LOC ready to go.

Yes it may cost a little extra however comparing that to the opportunity cost of missing out would be miniscule. Pro packs these days allow you all the flexiblity of changing loans around with no application fees etc for ~300 a year.

 

[bradje]

The seperate lender was suggested as a method to avoid paying LMI on the IP. It also avoids x-col at the same time.

The LOC was suggested so it is ready and waiting and no need for messing about with application and waiting on the bank whilst your trying to make a deal. Essentially just reducing a point of failure of the deal. You could do the same with a pre-approval I guess, however its not the same as having the money in your hand via LOC ready to go.

Yes it may cost a little extra however comparing that to the opportunity cost of missing out would be miniscule. Pro packs these days allow you all the flexiblity of changing loans around with no application fees etc for ~300 a year.

I recently bought an IP using LOC as 20% againt the loan, all with the same bank. No x-col needed. The new loan stands separate to the LOC. So i don't understand why u would seek a different lender necessarily? Or maybe I have mis-read the posts.
Thx,
JB

 

[Peter_Tersteeg]

You can take the new loan with the same lender or a different lender and avoid cross-collateralisation.

The point is, using the structure previously described, you've got the choice to go to another lender or to keep the same one. When you purchase the new IP, a different lender might have a better rate or policies that you may wish to take advantage of.

 

[thedude]

Hi bradje, no you havent misread, its just another option as PB has described.

P.B,

Do you know if the "All monies" clause still exist? This is one thing my previous MB raised when using the same lender for multiple loans even though they stood on their own.

 

[Bazza]

I recently bought an IP using LOC as 20% againt the loan, all with the same bank. No x-col needed. The new loan stands separate to the LOC. So i don't understand why u would seek a different lender necessarily? Or maybe I have mis-read the posts.
Thx,
JB

Which bank JB?

Cheers,

Bazza

 

[IshQ]

Correct me if i am wrong.

The reason for not giving cross collateral against your PPOR would be to reduce exposure of risk to your PPOR. (or any other property for that matter).

However in the scheme of things, if something was to occur to you financially and you were being sued etc all of your property is exposed. Plus, you are personal guaranteeing the loan over you IP regardless of whether you cross collaterise using your PPOR or not. Should you not have the capacity to cover any shortfalls on the IP loan, your personal liability will extend to other assets including your PPOR.

Any other reason why you would cross collateralise?

 

[Bazza]

Correct me if i am wrong.

The reason for not giving cross collateral against your PPOR would be to reduce exposure of risk to your PPOR. (or any other property for that matter).

However in the scheme of things, if something was to occur to you financially and you were being sued etc all of your property is exposed. Plus, you are personal guaranteeing the loan over you IP regardless of whether you cross collaterise using your PPOR or not. Should you not have the capacity to cover any shortfalls on the IP loan, your personal liability will extend to other assets including your PPOR.

Any other reason why you would cross collateralise?

We have a Hybrid Discretionary Trust which owns our IP's. So if anyone tries to sue us for what ever reason our PPOR is protected and vice-versa.

That's a good enough reason for me.

Cheers,

Bazza

 

[Peter_Tersteeg]

Ultimately the all moneys clause does still exist. Using the same lender does expose you to this risk, although it is minimal.

The best reason to avoid cross collateralisation is to give yourself flexibility. This can be acheived using the same lender or muliple lenders.