Loan Servicing Advice

Hi All,
I'm new to the forum and have loved reading all the great knowledge that is shared. I'm reasonably new to investing having purchased my first IP less than a year ago. I'm excited by the prospect of being able to add several properties in the years ahead!

Having been bitten by the property bug I've been considering when we might be ready for our next property. We are focusing on positive cash flow properties. I purchased the first IP using a P&I loan. We did this as it is in a regional centre and thought it would be good to build equity as we didn't know what the capital growth would be. I have substantial equity in my PPOR that could be accessed for our next deposit. What concerns me is that I might be quickly tapped out on the loan servicing criteria.

We are a single income family and I earn around the 100K mark. Given that I'm wanting to purchase positive cashflow property, I'd like to be able to keep adding properties, but feel like I will be stopped because of loan servicing criteria from the banks.

I've heard that servicing capacity can be maximised through the use of companies and family trusts.

I was hoping that people on this forum might be able to offer some advice and share their experiences. Any advice appreciated.
Cheers, :)
 
I purchased the first IP using a P&I loan.

This is not the best way of doing it as you are effectively paying back your loan and the 'equity' you created is just the money you repaid over time.

What concerns me is that I might be quickly tapped out on the loan servicing criteria.

What are you concerned about? Did you speak to your existing lender? Who is it?

I'd like to be able to keep adding properties, but feel like I will be stopped because of loan servicing criteria from the banks.

Oh I don't think that will happen after having one IP....you need to speak to a broker about your options.

I've heard that servicing capacity can be maximised through the use of companies and family trusts.

This is not true. There is no difference.
 
This is not the best way of doing it as you are effectively paying back your loan and the 'equity' you created is just the money you repaid over time.



What are you concerned about? Did you speak to your existing lender? Who is it?



Oh I don't think that will happen after having one IP....you need to speak to a broker about your options.



This is not true. There is no difference.
Hi Aaron. Thanks for your response. I appreciate the advice.

I think I understand what you are saying about the P&I, but my thought was that if I wanted to be able to release equity from that 1st IP in the future to finance other IP purchases that I might be able to do that faster if I was chipping away at the loan, rather than relying on capital growth alone. As the property was cash flow positive on an interest basis, it isn't requiring much out of my pocket on a P&I basis. Is this the wrong way to go about it?

With regards to my concerns about servicing. Even though we have substantial equity in our PPOR, we still have that mortgage repayment in addition to the IP repayment. I was worried about how the two repayments combined would be viewed. We are with NAB. I haven't gone back to our mortgage broker as yet to ask him but we pretty much borrowed as much as they would lend us with the first IP and that was only a year ago. That was why I thought we might struggle.

Thanks for your advice about the trusts, and companies. I'm actually pleased to hear that. My preference would be to keep it simple and keep the management costs down if possible.
 
I think I understand what you are saying about the P&I, but my thought was that if I wanted to be able to release equity from that 1st IP in the future to finance other IP purchases that I might be able to do that faster if I was chipping away at the loan, rather than relying on capital growth alone. As the property was cash flow positive on an interest basis, it isn't requiring much out of my pocket on a P&I basis. Is this the wrong way to go about it?

Yes this is the wrong way of thinking about it. If you owe $100,000 to the bank, and then reduce it to $80,000 over time by paying P&I, then redraw equity out later, all you are doing is getting your $20,000 back plus any extra equity you gained from capital growth....

It's best to leave the loan as interest-only, then get increases on the loan based on the capital growth only. Keep the excess funds in your offset account to reduce the interest payable. That way you are building up cash reserves and truly maximising equity.
 
A structured lending approach can typically glean 1.8 to 2.5 what a poorly structured one can

Its not Rocket Science............but does need a bunch of applied knowledge and modelling to ensure you use the right lender at the right time of the acquisition cycle for your resources.

Many would argue that finessing finance if you are on the boundaries will provide better outcomes than chasing the "perfect" investment vs an average one.

Company and trust loans can help in isolated cases with a specific lender mix, but in reality isnt a strategy as Aaron has already commented. Almost all lenders look at the personal guarantees thus given as a contingent liability.


ta

rolf
 
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