LOC question

[van75]

Hi guys

I have had this explained to me many times by different brokers but I still think I'm missing something... maybe I'm just dumb .. so can you guys tell me if I'm right..

Say I have PPOR worth 500K, and my loan balance is 250K. I'm told I could have 150K worth of LOC "to play with".. Now I assume that figure comes from:
80% of 500K = 400K, minus 250K = 150K... is this right?

Now if I did take out LOC of 150K to fund an IP, what happens to my original loan of 250K balance? Will the interest be calculated on 250K or 400K?

Now say I am buying an IP worth 400K including costs, I would draw 20% of the LOC as deposit = 80K, and take out another loan of 320K.. is this right?

So in the end I will have 3 loan "accounts":
250K secured against PPOR (P+I)
320K secured against IP (interest only)
150K LOC - of which I have only drawn 80K - so I will pay the interest on 80K only..

... is this right?

Now after all this I was told that most people would then prefer to have all their incomes inc. rent incomes put directly into the LOC - but I don't see why? Wouldnt you rather pay off the PPOR loan instead?

And finally, I then was told that with the rest of the LOC I could buy more IPs .. but doesn't this mean x-coll?


Thanks guys

 

[Rolf Schaefer]

Hi Van75,
you are almost spot on.

Your assumptions about the 3 loans are correct; if the original $250K loan for your PPOR is not tax deductible I would attach an Offset account to that loan and have all income going into this Offset account.

Once you have repaid all non-tax deductible debts you should start reducing your IP debts.

You are only x-collateralised if one loan uses more than one property as security.

Please double check with your accountant and financial planner.

 

[van75]

Hi Van75,
you are almost spot on.

Your assumptions about the 3 loans are correct; if the original $250K loan for your PPOR is not tax deductible I would attach an Offset account to that loan and have all income going into this Offset account.

Once you have repaid all non-tax deductible debts you should start reducing your IP debts.

You are only x-collateralised if one loan uses more than one property as security.

Please double check with your accountant and financial planner.

Thanks Rolf.

Now would I be charged LMI for the IP? Because technically i am borrowing 100+%, but in fact I am borrowing only 80% and use 20% coming off the LOC (which may be a different lender) as "deposit"?

The original 250K loan actually has a redraw facility, so I don't have offset account, instead I put all my savings including salary into the loan, and redraw when necessary. Don't know if this is a good/bad idea?

 

[Rolf Schaefer]

Hi Van75;
you should not have to pay LMI on the proposed structure (be sure that loans are not cross-collateralised if staying with the same lender).

Please give me a call should you need more detailed information concerning Redraw vs Offset functionality.

 

[van75]

Hi Van75;
you should not have to pay LMI on the proposed structure (be sure that loans are not cross-collateralised if staying with the same lender).

Please give me a call should you need more detailed information concerning Redraw vs Offset functionality.

Thanks Rolf for the assistance over the phone, really helped clear up my issues

 

[Minxdamanx]

Hi Van75,
you are almost spot on.

Your assumptions about the 3 loans are correct; if the original $250K loan for your PPOR is not tax deductible I would attach an Offset account to that loan and have all income going into this Offset account.

Once you have repaid all non-tax deductible debts you should start reducing your IP debts.

You are only x-collateralised if one loan uses more than one property as security.

Please double check with your accountant and financial planner.

Rolf and Van - this has cleared so much up for me - I get so much help from you all on this forum without even having to post!

 

[dean lynch]

In this situation a lender will look at the overall value of all the property and total amount of all loans. This means they can lean against both properties (500k + 380k = 880k) and you may choose to have as many loans as you need against that. If you have to borrow above 80% you maybe required to pay for mortgage insurance to protect the lender. You may decide to have a loan for your PPOR (250k) which you will aim to pay off as quickly as you can and have a loan for your IP up to the total value of the property and the fees and charges to purchase (400k). The total exposure for the lender is 250k + 400k = 650K and the percentage against the total property value is just under 74% (650k of 880k). This will give you room to possibly buy another IP. Some people choose to have the IP loan set for “Interest Only” repayments that way they are getting the maximum claim on their investment and they are putting any extra money straight on their PPOR. Once they completely pay out their PPOR they can then decide if they would like to own the IP/s or sell for capital gain.

Cheers,
Dean Lynch
Principle Mortgage Consultant
Australian Mortgage Brokers
E: [email protected]
W: www.deanlynch.com.au

 

[Saint]

Dean

It sounds like you are proposing to do the loans with one lender and cross secure - is that how to do it (realise this is in theory)

 

[dean lynch]

You can own an investment property and have a loan against it for the total value plus the fees and charges. This should give you the greatest tax claim and reduce the debt against your owner occupied property and if you make it “interest only” you only have to service the interest and any extra payment you have can go on you PPOR.

In order to avoid mortgage insurance you can cross secure. If you decide to have loans with separate lenders then you will be subject to mortgage insurance on any borrowings above 80%. That means if you borrow 100% of the investment property value (for most lenders that is the maximum allowance against property) you will incur a high premium because your investment property lender has no more security for this transaction. If you cross secure your total borrowings against your total debt will not reach 80% because all the security is securing all the debt. Once you have paid out your PPOR and reduced your borrowings to under 80% of the IP value you can release the PPOR from any commitment to your overall debt and not incur any mortgage insurance fee.

Does that make sense?

Cheers,
Dean Lynch
Principle Mortgage Consultant
Australian Mortgage Brokers
E: [email protected]
W: www.deanlynch.com.au

 

[Saint]

I think I see where you are heading in trying to avoid a mortgage insurance premium....

Why would you not raise up to 20% loan against your ppr via a line of credit or variable/offset and the remainder against the rental property even with taking on mortgage insurance and not cross secure them.

What happens if your lender isnt offering the same rate as someone else is?

 

[Qlds007]

Saint

You would...... thats how we structure all of our clients IP acquisitions.

 

[Rolf Latham]

Hiya Dean

Welcome.

Generally, cross coll is about as off as a raw prawn after a long hot sunny day ........

As Saint has alluded, there are smarter and more flexible ways to avoid LMI.

Cross collcan suit a client at times, in some situations.

ta
rolf

 

[Psyk]

Hi guys

I have had this explained to me many times by different brokers but I still think I'm missing something... maybe I'm just dumb .. so can you guys tell me if I'm right..

Say I have PPOR worth 500K, and my loan balance is 250K. I'm told I could have 150K worth of LOC "to play with".. Now I assume that figure comes from:
80% of 500K = 400K, minus 250K = 150K... is this right?

Now if I did take out LOC of 150K to fund an IP, what happens to my original loan of 250K balance? Will the interest be calculated on 250K or 400K?

Now say I am buying an IP worth 400K including costs, I would draw 20% of the LOC as deposit = 80K, and take out another loan of 320K.. is this right?

So in the end I will have 3 loan "accounts":
250K secured against PPOR (P+I)
320K secured against IP (interest only)
150K LOC - of which I have only drawn 80K - so I will pay the interest on 80K only..

... is this right?

Now after all this I was told that most people would then prefer to have all their incomes inc. rent incomes put directly into the LOC - but I don't see why? Wouldnt you rather pay off the PPOR loan instead?

And finally, I then was told that with the rest of the LOC I could buy more IPs .. but doesn't this mean x-coll?


Thanks guys

Quick clarification, would the LOC effectivley be a new and replacement loan against the PPOR which it was lent against?

For example in the above scenario:

• $320K secured against IP.
• $500K valued IP with $250K loan, 80% LOC being $400K total available
• $400K less the $250K (owing on loan) is...
• $150K left on the LOC overdraft

Final loans result being...

• $320K secured against IP
• $150K left on a total $400K LOC as $250K of it was used to pay the outstanding home loan.

Is my understanding correct?