How to use collateral?

[salt]

Hi all, I have a question about using collateral in order to purchase another home. Please bare with me, I've really got no idea!

We bought a house for $179,000, with a deposit of $40,000 around a year and a half ago, so the loan was about $140,000. We've done a complete reno inside and out, new kitchen, bathroom, paint landscaping the whole thing for just over $20,000.

The area isn't that great, but house values are steadily growing in the area. We ran all the real estate agents through and they said we could hope for $249,000 but a realistic price would be $220,000. There are similar houses in the area for $249,000 without a reno....So we were of course hoping for at least $250,000 but the *** dropped out of the market and houses are slow to sell now. Rents on the other hand are really high, and we could easily get double the repayment costs in rent each week.

So instead of selling I was thinking it may be smarter to try and use the collateral in the house in order to purchase another property and continue on from there.

Being that we've only owned the house for a year and half, would that be an option for us? Would the bank take into consideration the renovations and would it in turn unlock more equity? How exactly would it work and what is the process?

We want to continue with property investment but can't get another deposit together at this point in time and were hoping that we could use equity.

Thanks guys!

 

[Aaron_C]

Yes it is certainly possible and you should structure it right from the beginning. Usually the best course of action is to order a valuation upfront on your property to see what the value is, then you know exactly how much equity to get out for future purchases etc.

 

[salt]

Thanks for the reply. Would the bank (credit union in case) send out their own evaluator though? Should we bother with an independent evaluator if the credit union would just use their own anyways?

 

[Aaron_C]

Thanks for the reply. Would the bank (credit union in case) send out their own evaluator though? Should we bother with an independent evaluator if the credit union would just use their own anyways?

Brokers can order valuations with banks upfront before any application. We do it all the time.

 

[Shahin_Afarin]

You should definitely order an upfront valuations where possible.

What is your current loan amount?

What is the purchase price of your next property?

Regards

Shahin

 

[Rolf Latham]

It looks like you purchased your property with an 80% loan.

Providing that your loan is not fixed, you have the capacity to move to another lender that will do upfront valuations with reasonable ease, assuming of course that your financial situation in terms of income and your credit file and credit history is okay.

For many clients that are with credit unions and banks that do not do upfront valuations, they can find that their progress to investing is quite severely hampered when it need NOT be.

Structuring credit advice around a scenario where an important critical component is missing such as the valuation, and then making an application on the basis of that missing information, and then the lender finally doing their valuation can often leave you out in the cold having wasted your time and effort and excitement, your lenders time, but more that importantly than all that is that your credit reference file may be adversely affected by these useless credit hits.

Where ever possible our business refuses to work with lenders that do not do upfront valuations we were are doing refinances or equity pulls, because in the current market in most States you can get a variation of 8 to 15% on valuations

Just to give an example recently we did a revaluation of property in Melbourne, during the one-week we had three valuations from bank valuers from between 1.2 to $1.5 million.

The spread difference alone was worth $240,000 worth of accessible equity.

Geared even at a “moderate” 80% loan to value ratio that was an extra $1 million worth of”rope” for this particular client who is very much equity rather than serviceability bound.

At 90 % lvr, that spread represents approx 1.5 mill more leverage than was possible with the lowest val.

Be aware too though, that leverage is a double edged sword and if used inappropriately or without suitable risk managament, the extra rope can become a major problem.

ta
rolf