I've had the wind taken out of my sails

[Shuttergirl]

My husband and I thought we were ready to put things in place to buy our first IP. He earns well into 6 figures, I have my own business which is young but chugging along nicely. We have finally paid off all consumer debt and now only have our mortgage to contend with. We have alot of disposable income now and as we are better at paying stuff off than saving large chunks of money, we certainly felt we needed to do something about securing our future before we got used to having so much extra money.

We have approx. $160,000 to $170,000 equity in our home and it is worth around $500,000 conversatively, maybe $520,000. We owe $340,000.

I went and saw a mortgage broker yesterday who was recommended by a friend. He had already done some preliminary figures based on hubby's wage, he said he probably didn't need to factor mine in at this time. I said we weren't exactly sure how much we wanted to spend but I said to work it out on a $350k purchase. He said we would come in at around 79% LVR, this included borrowing the purchase costs as well.

So then in the end, he suggested we don't buy a property now, he said we should wait a year, pay as much off our mortgage as possible and then come back and look into it again.

It was absolutely not the response I was expecting. I was stunned I guess. I figured we had the equity, the servicibility, ongoing wage prospects, etc.

I told him I wouldn't be prepared to wait 12 months but would maybe wait until after Christmas.

I realise he is a very kind man, and was definitely thinking about what he feels is in our best interests, but I'm not sure what do to now. Is he right? Are we not ready to do this?

I went away and thought about it and have decided to talk with another mortgage broker to get a second opinion. My husband is concerned I'm going to keep shopping till I hear what I want but I just want to know if another broker would suggest this same course of action. Is it because the first broker was conservative or is he right about waiting? So Ed Nixon was a MB recommended on this forum to me for Canberra so we are having a phone consultation today.

I would like to hear everyone's thoughts at this time because I am now not exactly sure what to do.

 

[Shadow]

We have approx. $160,000 to $170,000 equity in our home and it is worth around $500,000 conversatively, maybe $520,000. We owe $340,000.

I went and saw a mortgage broker yesterday who was recommended by a friend. He had already done some preliminary figures based on hubby's wage, he said he probably didn't need to factor mine in at this time. I said we weren't exactly sure how much we wanted to spend but I said to work it out on a $350k purchase. He said we would come in at around 79% LVR, this included borrowing the purchase costs as well.

Hi Shuttergirl, although you have $160K equity, you really only have $60K of 'usable' equity, because assuming 80% LVR you would need to leave $100K against your PPOR.

This $60K could get you an IP for approx $200K.

Assume 20% deposit = $40K plus 6% costs (stamp duty, legal costs etc.) = $12K.

If you were happy to go with a higher LVR, say 85% or 90% and pay Lenders Mortgage Insurance then you can get a more expensive IP. As you say, if you have lots of disposable income it might be a good idea to use it - you can probably afford to pay the LMI.

Cheers, Shadow.

 

[Simon]

Well that is an unusual thing from a Mortgage Broker - the media would have you believe they are forcing debt down everybody's throats!

You certainly appear to have the income to support a rental property and an LVR below 80% isn't stretching it too tight by many investor's standards.

You wont go wrong with Ed, he is definately one of the good guys.

Cheers,

 

[WillG]

I don't believe it is the mortgage brokers job to tell you when to buy properties.

From what you have said, it doesn't appear that you have a savings track record (I base this purely on your statement 'We have finally paid off all consumer debt and now only have our mortgage to contend with'). This may be be a problem with the bank lending you money.

Rather than 'shooting the mortgage broker', get him to qualify how is coming to the conclusion of waiting until after christmas.

Some questions to clarify your position
Q. What percentage of disposable income do you currently have left after paying your PPOR mortage ?
Q. What percentage of disposable income do you currently have left after paying your PPOR mortage if the interest rate rose another 2% ?
Q. What percentage of disposable income would you have have left after paying your PPOR mortage and a negative geared IP to the tune of $10k per year ?
Q. What percentage of disposable income would you have have left after paying your PPOR mortage and a negative geared IP if interest rates rose 2% ?

If you require less than 30% of your combined income after tax to buy a negative geared IP and run your mortgage at an interest rate 2% higher than the current rate, I believe you should be OK - this isn't financial advice.

Good luck

 

[Simon]

Hi Shuttergirl, although you have $160K equity, you really only have $60K of 'usable' equity, because assuming 80% LVR you would need to leave $100K against your PPOR.

This $60K could get you an IP for approx $200K.

Assume 20% deposit = $40K plus 6% costs (stamp duty, legal costs etc.) = $12K.

If you were happy to go with a higher LVR, say 85% or 90% and pay Lenders Mortgage Insurance then you can get a more expensive IP. As you say, if you have lots of disposable income it might be a good idea to use it - you can probably afford to pay the LMI.

Cheers, Shadow.

Current loan of $340K plus new loan of $365K = $705K.

New total value $520K+ $350K= $870K

New LVR = 81%.

Pretty close to 79%

 

[Simon]

This is a personal opinion from an investor - not advice.

If you have a high disposable income I always found a good way to force savings was to take a debt for an investment then meet the repayments. This "imposed discipline" really made a difference to the younger me.

Borrowing for shares or property is good debt - as you know. With shares you can always dispose of some/all easily if your situation changes. If your income is that high then don't be scared to borrow.

Consider saving in an offset account but don't use that cash to invest with. Borrow to invest. This way we are converting the nondeductible debt into deductible debt.

Hope this helps.

Cheers,

 

[Shadow]

By the way, Westpac will let you go to 85% LVR without paying LMI.

 

[joeygbh]

I say it would really depend on how the market turns in the coming year - do we really expect the interest rates to affect people's borrowing power and demand that much and how much houses will go up in response to it. If I reflect back on my position say about a year back, my family was fully paid up (1 PPOR and 2 IP ~ 1 Mil) and had about 20k in the bank cash. We wanted a bit more of a buffer after working for so long to pay off the properties including a 500k debt from playing in the shares for a while. Income generation (work, investments etc) was in the order of 100k a year after expenses and taxes.

But we still didn't feel secure so we waited for a bigger deposit. Now a year on, 130k in the bank I have second thoughts about waiting so long - property prices have moved significantly in my area and we really should have been back in the game a lot sooner, rather than wait for "prices to fall" due to interest rises. Even now with 2 new investment properties in what people would consider a "hot" market, we are ~45% LVR. Of course my position is different to yours, buit it provides background as to why I am going to advise the following:

My advice is to watch these next quarter, see how people respond to the interest rate rise - if it doesn't seem to dampen people's spirits then I would say get into it so long as the maths adds up - you can always go for a smaller property (~150-200k) if needed to bring the LVR down. In some ways I'm recommending you to get into it just because of getting into the habit and lifestyle which accommodates servicing debt rather than taking it "easy" and getting into the game "too late". Its hard to break bad habits of spending once you get used to having that sort of lifestyle, better to get used to scrimping and saving for your goals now rather than later.

 

[geoffw]

Many brokers are only orientated towards residential property.

Forumite Mr Ed (Ed Nixon) is based in Canberra (Kingston) and really knows his stuff with investment properties.

 

[fozzy]

Hi Shuttergirl,

That is a bit of a bummer, especially when you seem to be getting right into this. I like the suggestion above about taking on debt for an investment as a means of forced saving, especially if you have the disposable income to support it. The fact that it is a smaller/cheaper property than you had expected to get shouldn't matter. I always find the trouble with waiting is that I lose all the momentum and enthusiasm that I have gained and when the time comes to actually do it, it is like starting over again.

We were in a similar position a few years ago with a modest amount of equity in our PPOR and we decided to use that equity to leverage into shares. That allowed us to borrow to buy some assets and it allowed us to start on a small scale. I was (still am) fairly conservative and the liquidity of shares gave me some comfort in the event things went pear shaped. Luckily for us we invested at the right time and those shares have now allowed us to leverage into our first IP. In hindsight we could have just as easily invested in a cheaper property and had a similar outcome. If I had waited then I probably would have missed out on a lot of growth and may never gotten around to buying anything.

 

[HeXa]

guessing he/she said to hold off buying was that every $1 you put into your PPOR mortgage means you can borrow $4 back... and that $350k wouldn't buy you much locally (talking apartment or a small 3br house/townhouse).

Like others have said, shop around - a good broker will sit down and explain other legal ways of getting you a better loan deal

 

[Shuttergirl]

Hi Shuttergirl, although you have $160K equity, you really only have $60K of 'usable' equity, because assuming 80% LVR you would need to leave $100K against your PPOR.

This $60K could get you an IP for approx $200K.

Assume 20% deposit = $40K plus 6% costs (stamp duty, legal costs etc.) = $12K.

If you were happy to go with a higher LVR, say 85% or 90% and pay Lenders Mortgage Insurance then you can get a more expensive IP. As you say, if you have lots of disposable income it might be a good idea to use it - you can probably afford to pay the LMI.

Cheers, Shadow.

Thanks Shadow, I would prefer not to go over 80% but I wouldn't rule out LMI I guess.

You wont go wrong with Ed, he is definately one of the good guys.

Thanks Simon

From what you have said, it doesn't appear that you have a savings track record (I base this purely on your statement 'We have finally paid off all consumer debt and now only have our mortgage to contend with'). This may be be a problem with the bank lending you money.

I could've worded my post better I think WillG. The background is that when we bought the house a few years ago, hubby wasn't earning as much, I wasn't earning much at all, our kids were alot younger and the mortgage really stretched our finances to the limit. We ran up some credit card debt over that time. IN the past 8-12 months out finances have improved, we paid off the credit card, bought another car and upgraded some things in the home that were desperately overdue. Hubby recently go a new job that pays alot more and my business has had a great 6 months so although. I think we've also seen the light and really want to create a bright future for ourselves and our children and are ready to again buckle down and build something pretty special for the future.

 

[Simon]

Savings track record is important only for your fist property purchase. After this the banks are more interested in whether you have met your repayments on schedule.

 

[Shuttergirl]

This is a personal opinion from an investor - not advice.

If you have a high disposable income I always found a good way to force savings was to take a debt for an investment then meet the repayments. This "imposed discipline" really made a difference to the younger me.

Borrowing for shares or property is good debt - as you know. With shares you can always dispose of some/all easily if your situation changes. If your income is that high then don't be scared to borrow.

Consider saving in an offset account but don't use that cash to invest with. Borrow to invest. This way we are converting the nondeductible debt into deductible debt.

Hope this helps.

Cheers,

Simon, you have been tremendously helpful and generous with your wisdom. I agree about the imposed discipline. This style would very much suit us. I am really not feeling worried about borrowing, I know we can well and truly afford it, on hubby's wage alone without even taking my income into consideration. I am definitely ready to do this, emotionally as well as financially.

 

[Shuttergirl]

Hi Shuttergirl,

That is a bit of a bummer, especially when you seem to be getting right into this. I like the suggestion above about taking on debt for an investment as a means of forced saving, especially if you have the disposable income to support it. The fact that it is a smaller/cheaper property than you had expected to get shouldn't matter. I always find the trouble with waiting is that I lose all the momentum and enthusiasm that I have gained and when the time comes to actually do it, it is like starting over again.

Very true words Fozzy. The momentum and enthusiasm comment really resonates with me.

Forumite Mr Ed (Ed Nixon) is based in Canberra (Kingston) and really knows his stuff with investment properties.

Thank you Geoff, it was you who had recommended him to me in the first place, so thanks.

Thanks Hexa, he did say to give the Canberra market a miss, out of our price range.

 

[Shuttergirl]

Okay, so it ended up being Ed's sidekick mortgage broker who I spoke with (he probably assumed I was a bit small fry for him for now which is perfectly right, hehe). Anyway, Nardia was excellent. She went through everything very clearly for me, had lots of positive things to say, had alot of suggestions to help us narrow the search for where to invest, she was able to talk about our long term goals, not just short term. She seemed extremely knowledgeable about our current interest rate with our current lender, about ways to set things up, etc. She was straightforward, optimistic, friendly, full of ideas and funny.

I felt immediately like she was the person to help us take our first baby step, and I'm sure her and Ed can lead us through future steps on our investment path. She didn't really say anything too different to the mortgage broker I had previously seen, she just is more of a cup is half full girl and the other guy was a cup is half empty. I'm a cup is half full girl myself so a more positive attitude sits with me much better. She explained our limitations and ways to handle them and I am feeling pretty happy about things right now. I feel she will truly hold my hand through this so I just want to say, thanks to all of you for recommending the company and for so generously sharing your wisdom with me. I'm gonna need to pick your brains more and more over the coming weeks/months but I will always be grateful for every single thing you share with me.

 

[alexlee]

Shuttergirl, how about something cheaper? If taking out 60k would put you to 80%, you can look for properties around the $250k mark? If there is nothing in Canberra, you should be able to find something in the other cities?
Alex

 

[BayView]

The interest on your PPoR is the debt you want to clear as fast as possible because it is not tax deductible.
The question about whether or not to buy an I.P would be; could you contunue to keep paying down the mortgage on the PPoR whilst holding an I.P (given that a pos cashflowed one is harder to find these days).
Ideally, you would do both, and maybe looking at a cheaper I.P for starters so you can still allocate some funds towards extra payments on the PPoR is the way to go.
A cheaper I.P will usually return a better rent, and your LVR (Loan to Value Ratio) won't take as big a hit, which I like to see for new investors; not good to get too extended with a family and your PPoR on the line as well.

 

[Simon]

The interest on your PPoR is the debt you want to clear as fast as possible because it is not tax deductible.
The question about whether or not to buy an I.P would be; could you contunue to keep paying down the mortgage on the PPoR whilst holding an I.P (given that a pos cashflowed one is harder to find these days).
Ideally, you would do both, and maybe looking at a cheaper I.P for starters so you can still allocate some funds towards extra payments on the PPoR is the way to go.
A cheaper I.P will usually return a better rent, and your LVR (Loan to Value Ratio) won't take as big a hit, which I like to see for new investors; not good to get too extended with a family and your PPoR on the line as well.

You reckon a couple with a high disposable income needs to look for that elusive pos cashflow property? I reckon I would be targetting Capital Growth potential and not losing any sleep over a shortfall of $50 or so pw.

I also question the wisdom of a young couple clearing a PPOR debt ASAP. I would only do so via the Offset account if possible.

Cheers,

 

[Shuttergirl]

Shuttergirl, how about something cheaper? If taking out 60k would put you to 80%, you can look for properties around the $250k mark? If there is nothing in Canberra, you should be able to find something in the other cities?

Good point Alexlee. Canberra is definitely a bit pricey for us at the moment so since we are originally from Victoria, Nardia suggested looking at Melbourne since we would be more familiar there. Maybe the outer suburbs somewhere or Geelong.

LA Aussie, we can definitely afford to do both, and will probably do as Simon suggest by putting it into an offset account in case it is needed.