LVR when borrowing against the equity?

[pi2012]

Hello all,
I am just wondering how much one could borrow against the equity in PPOR or IP...for example:
Value of a property when purchased - $400,000
Mortgage: $380,000 (LVR: 95%)

Assumption:
After couple of years:
Bank Valuation: $600,000
Mortgage: $380,000
Equity: 220,000
Now how much of that $220,00 one could borrow as in LOC or Margin Lending?
Thanks in advance.

 

[BayView]

Generally, the lender will let you borrow up to 80% of the property value, less any outstanding loans.

So, your $600k property has a useable equity of $480k. You still owe $380k, therfore your useable equity is $100k.

I think some lenders will allow you to access more than 80%, but in my opinion that is a very dangerous practice; especially if you are using your PPoR.

 

[yo yo ma]

Now how much of that $220,00 one could borrow as in LOC or Margin Lending?

Margin lending is different... It is only based on your income. You will note that equity & debt are not taken into account for margin lending. Have a look at this article by Sim on invested:
How Margin Loans Work.

 

[pi2012]

Generally, the lender will let you borrow up to 80% of the property value, less any outstanding loans.

So, your $600k property has a useable equity of $480k. You still owe $380k, therfore your useable equity is $100k.

I think some lenders will allow you to access more than 80%, but in my opinion that is a very dangerous practice; especially if you are using your PPoR.

Thanks L.AAussie.
I do understand that borrowing more than 80% is dangerous...but i am in very early phase of porperty investment and will definitely need more cash flow for future investments. I would like to try for 90% LVR and keep a good buffer to cover the IO re-payments...

 

[pi2012]

Margin lending is different... It is only based on your income. You will note that equity & debt are not taken into account for margin lending. Have a look at this article by Sim on invested:
How Margin Loans Work.

Thanks yo yo ma for the link. All clear now

 

[Peter_Tersteeg]

You can borrow up to 95% with a few lenders, although most will only go to 90%. You will pay LMI however.

I agree there is some risk in this strategy, but it's up to you to determine what you're comfortable with.

 

[pi2012]

You can borrow up to 95% with a few lenders, although most will only go to 90%. You will pay LMI however.

I agree there is some risk in this strategy, but it's up to you to determine what you're comfortable with.

Thanks Peter. I totally understand the risks involved and as i mentioned earlier, i will be needing access to the maximimum cash flow at this early phase of my investments and down the track, i will work on reducing the LVR....thats the Strategy.

Peter, just a question...does the big banks let you borrow 90% or we are talking about the non confirming lenders

 

[steveadl]

Thanks Peter. I totally understand the risks involved and as i mentioned earlier, i will be needing access to the maximimum cash flow at this early phase of my investments and down the track, i will work on reducing the LVR....thats the Strategy.

Peter, just a question...does the big banks let you borrow 90% or we are talking about the non confirming lenders

I agree with your strategy as well pi. While I'm young I'm going for the max LVR. Also, when you buy right, you don't necessarily have to "work" on reducing the LVR - the market does that for you. I started the year off on 80% LVR, now sitting on 73% (if only it always happened that quick).

 

[pi2012]

I agree with your strategy as well pi. While I'm young I'm going for the max LVR. Also, when you buy right, you don't necessarily have to "work" on reducing the LVR - the market does that for you. I started the year off on 80% LVR, now sitting on 73% (if only it always happened that quick).

Thanks Steveadl. Thats the plan for atleast next 3 years ...borrow MAX

 

[Rolf Latham]

Whose risk is it anway ?

Hiya

Borrowing more than 80 % LVR dangerous ?

Dunno, here is a contrarian view



Whose risk is it anway ?

One of my favourite canned responses.

Example

Buy a 500 k place with a 100 k deposit, and not a CENT left in the bank


Tommorow u are redundant OR you have the business opprtunity of a life time that costs 60 k to get into............but u only have 24 hrs



Alternate strategy

Borrow 95 % with capped mortgage insurance IO loan, with 100 % offset

Take the 75 k left over and tip it into your offset acct


If that redundancy or that opportunity comes along you are better prepared..........so whose risk is it to borrow more than 80 ??

ta
rolf

 

[pi2012]

Hiya

Borrowing more than 80 % LVR dangerous ?

Dunno, here is a contrarian view



Whose risk is it anway ?

One of my favourite canned responses.

Example

Buy a 500 k place with a 100 k deposit, and not a CENT left in the bank


Tommorow u are redundant OR you have the business opprtunity of a life time that costs 60 k to get into............but u only have 24 hrs



Alternate strategy

Borrow 95 % with capped mortgage insurance IO loan, with 100 % offset

Take the 75 k left over and tip it into your offset acct


If that redundancy or that opportunity comes along you are better prepared..........so whose risk is it to borrow more than 80 ??

ta
rolf

Good point. Thanks Rolf. Will definitely look into this..

 

[Peter_Tersteeg]

There are a few parameters around it, but just about every lender will go to 90%, with cash out (you get cash in the hand after the refinance).

A few will also go to 95%.

 

[pi2012]

Sorry...i have to refer back to this thread.
I've got the exact figures this time:
Last Valuation report:
Value: $350,000
Borrowed 95% = $332,500.

Now recent valuation:
Value: $400,000
So is it possible to borrow again 95% and setup LOC to fund for the Development project (as a deposit money for construction loan).
Thanks in advance.

 

[alexlee]

You're talking about borrowing an extra 45k, right? You might want to check how much LMI you are up for.
Alex

 

[BayView]

Hiya

Borrowing more than 80 % LVR dangerous ?

Dunno, here is a contrarian view



Whose risk is it anway ?

One of my favourite canned responses.

Example

Buy a 500 k place with a 100 k deposit, and not a CENT left in the bank


Tommorow u are redundant OR you have the business opprtunity of a life time that costs 60 k to get into............but u only have 24 hrs



Alternate strategy

Borrow 95 % with capped mortgage insurance IO loan, with 100 % offset

Take the 75 k left over and tip it into your offset acct


If that redundancy or that opportunity comes along you are better prepared..........so whose risk is it to borrow more than 80 ??

ta
rolf

Sounds plausible.

How 'bout this; after the redundancy, you are out of work for a couple of weeks, but that's ok; you've got the $75k in the offset.

Then; you fall down the front steps and break a hip, and your leg is fractured in 3 places (happens EVERY day; ask my wife; she's a nurse), you've got no income, and no private health insurance.

The hospital will cover the initial treatments, but then you have 3 - 6 months of physio, which is not covered by Medicare.

You can't work for the first 4 months due to the injuries, and the physio bills start to come in.

Then, your tenant who is in arrears, moves out unexpectedly, breaking the lease and leaves $1500 of damage. Disappears in the night.

The LI covers the shortfall; eventually, but there is the $500 excess to pay as well, and you have no tenant until the damage is repaired, and there is a month of vacancy after the repairs are completed.

Two days after the tenant vamooses, the rates go up another half a percent.

A week later, three houses further up the street, the owner has to sell due to financial stress, and sells it for a song just to cut and run. This basically revalues your home at $420k due to the similarity and proximity of the two houses.

Can't happen? Of course it can.

Maybe a long shot, but my motto is; "expect the best, but prepare for the worst".

Not trying to be all gloom and doom, but there has to be some sense of safety applied to all of this racing to get rich and maximising the LVR etc, because Life does happen.

 

[steveadl]

You paint quite the picture Marc!

You forgot to add that 3 months in New Zealand threatens to declare war on us and demands $50k from every Australian to leave us alone.

Just messing with you mate, you're right, it makes sense to prepare for the worst.

 

[BayView]

You paint quite the picture Marc!

You forgot to add that 3 months in New Zealand threatens to declare war on us and demands $50k from every Australian to leave us alone.

Just messing with you mate, you're right, it makes sense to prepare for the worst.

Obviously a teeny bit overdone, but it makes me nervous when I here about people gearing up to the hilt; LVR's of 95%, 100% or even (worse) over 100%, and with no wiggle room if things go south.

And the common response is "oh yeah; but I can easily service the loan".

Scary.

 

[VYBerlinaV8]

This is where risk management comes in. Basically, it's up to each of us to work out what can go wrong, and what we're prepared to do if/when it does.

Some examples of things that can go wrong include:
* Tenant fails to pay rent
* Damage to the property
* Interest rate increases
* Loss of income
* Property price drop (either localised or widespread).

So now you need to consider what to do. Some examples include:
* Maintain cash reserve sufficient for X weeks living and/or Y months loan repayments
* Landlord and building insurance
* Quality property manager who will give you 'heads up' on problems early
* Diversified IP locations
* Bond from tenant

Of course, individual properties will have their own specific risks. For example, my semi commercial properties have long term (10 year with 3 x 5 year options) leases, so I had to consider what I would do if they stopped paying rent.

Now, there is typically a cost (real or opportunity) associated with risk mitigations - ie insurance costs money, cash reserve may cost opportunity, so you need to work out how much you're prepared to pay to mitigate the risk, by looking at the likelihood and consequence of each risk occurring. There's not much point paying $10 to protect a $1 asset!

Although this seems like a complex process, it is incredibly helpful for working out what risks you are really exposed to, and what you need to do about it. For me, this is more important than simply saying "don't have an LVR of greater than X%". Having an LVR limit is a risk mitigation in itself, but it's important to know what the risk you're mitigating is, and what your real exposure is.

 

[pi2012]

I totally agree that there are a huge risks in maximising LVR.
But at this stage, cash flow is really critical to complete the development project and hence increasing the LVR.
Once the development is completed...there will be enough funds for the unexpected but i guess at this stage, i have to take that risk to complete the project.
Hence i was enquiring if it will be possible to borrow 95% of the equity as in LOC.

 

[pi2012]

You're talking about borrowing an extra 45k, right? You might want to check how much LMI you are up for.
Alex

Thanks Alexlee. Happy to pay LMI as it will be roughly between $1000 - $1500. This $45000 will be used as a deposit to borrow construction loan for a development project.
Need suggestions if i am doing right?