Loan Structure - First IP

[GLAD73]

Hi,
I am seeking some advice, direction and suggestions and I would very much appreciate your input.

My wife and I are looking to purchase our first IP this year. Our goal is to build a property portfolio that will assist us in retirement and provide a stepping stone for our three kids when each one reaches adulthood (which at this point in time can't come soon enough!). Before we purchase that first IP, we want to ensure we have our loan structure set up correctly and it is this area that I am seeking your advice, opinions and suggestions.

Our current loan structure is set up around our PPOR. We purchased the house in 2009 and the total mortgage is currently at $409K. The total mortgage is split in two and looks like this:

Variable P&I = $89K. This also has an offset feature that we place all our surplus money into.

Fixed IO = $320K. The fixed period has roughly 12 months left.

Last week, we sought and were provided with a bank valuation (desktop) on our PPOR. The figure came in at $630K. I am advised by my Mortgage Broker that, after all things considered we could have access to (approx) $95K of usable equity.

To move forward with our investment plan we are looking at setting up with our current lender a LOC against the usable equity ($95K), and then use the LOC for the deposit, purchasing costs, buffer etc for the IP. The outstanding mortgage for the IP will be sought from a different lender.

In relation to the loan structure for our PPOR, do you think we should be setting it up differently? Perhaps we should combine the two mortgage to one P&I, or IO loan with the offset function? Perhaps it is fine as it is?

Your time, advice, suggestions (and upper-cuts) are very much appreciated.

 

[Shahin_Afarin]

I would:

1. Convert the existing variable into an IO loan and save the principle repayments in the offset so long as you are disciplined with your money

2. Keep the 2 variable loans (existing and new equity release loan) separate so that you do not contaminate the tax deductibility of the loans.

 

[Rolf Latham]

An important question is

what will you do long term with the current PPOR pls ?

ta
rolf

 

[GLAD73]

Thanks for your advice Shahin and so quickly too.

I just want to clarify, when you referred to Equity Release Loan, is that another term for LOC?

Grant

 

[Shahin_Afarin]

Thanks for your advice Shahin and so quickly too.

I just want to clarify, when you referred to Equity Release Loan, is that another term for LOC?

Grant

Yes. I would personally go for a term loan instead of a LOC because its generally cheaper and it doesn't have an on demand repayable clause.

 

[GLAD73]

Hi Rolf,

Long term plan for our PPOR is to either renovate (add room and upgrade kitchen, bathroom) or sell.

We decided against a Reno now so we could work on our investment goals. If we do go with a Reno on the PPOR it would not be for a few years and when we can use any addition equity that the PPOR has generated.

If we decide to sell, we would consider renting so as to assist our borrowing capacity and then purchase a new PPOR when we are in a better financial position.

Grant