Money for deposit

[h8dk97]

I am interested to know if other people had similar ideas or actually did it: I have equity in my POPR which I can use to buy an IP, would that be better for me to borrow more money, say for renovation (and I can change my mind at later stage), and then using the money borrowed for a deposit. That way I don’t use my POPR as a security. I will be able to claim a % of interest on my POPR since the money came from that loan.

Do you think it is worth doing? are there any other alternatives?

Thank you.

 

[geoffw]

Jerry,

That's very worth while doing- use a Line of Credit (LOC) to get the deposit for your next property. I’ve done that before.

You are really using your PPOR as security for the LOC, so it’s not completely out of the equation. But it does avoid a direct cross-collaterisation, and if you borrow more than 80% for an IP, mortgage insurance will only be charged on your IP, not on IP plus PPOR if you cross-collateralise.

You’ll typically not be allowed to borrow over 80% of the value of your PPOR.

 

[Kathryn]

Hi Jerry,

We got a LOC against our PPOR in case we found a property we wanted...then we would have the deposit and get a separate loan for the rest.

We ended up finding a property, but decided it was too expensive to keep, so we used the LOC to pay for the whole lot plus renovations and are going to resell in a few months. The interest is just being capitalised onto the LOC and when we sell we hope to pay the whole lot off plus have a profit on top.

Settlement is tomorrow noon, we have timber for the new deck being delivered in the afternoon and the work begins!

It is a risk, and a bit scary, but we had to make a quick decision. The property was never advertised and we bought it within a week of it coming on the market (real estate friend had contacted us). We put it in my name as I make less than my husband and I hadn't even seen the inside!

We were a bit hesitant at first about using our PPOR as collateral for a LOC, but now wouldn't hesitate.

Good luck,
Kathryn

 

[Jude H]

Hi Kathryn,

Good for you!

My type of girl, take the plunge, bite the bullet etc

Please keep us informed of how you go. Good and bad if you don't mind. Would be very interested to hear all aspects of deal.

Good luck to you, she'll be right

 

[brains]

Kathryn,

What do you mean the hosue was too expensive to keep? Do you mean the rental return is low? Loan payments too high? Or both?

Im from the central coast as well and i know yields can be low around here as prices have increased substantially in the last two years.


Good luck with your reno.

 

[Kathryn]

Hi Brains,

Both....there is a shortfall of a couple hundred a week as we are using 100 +% financing. There is a lot of work to be done, but we think we can increase the current value by at least 50k with a bit of hard work and about 20k in renovations. We are doing most of the work ourselves so we'll save a bit of money there.

We didn't buy with the intention of holding on to this one. As you know, Terrigal isn't a cheap place to buy, and the rental return isn't sufficient. This is our first reno and sell so wish us luck.

Cheers,
Kathryn

 

[Kevmeister]

Jerry,

We are also in the throes of establishing a LOC against our PPOR equity to use when we find an appropriate property (our first IP).

In our case our LOC will be limited to 80% LVR so we have some degree of breathing room.

We did this because of the varying posts on this forum that mostly seem to advise against cross-collateralisation.

Hope this helps.

 

[h8dk97]

Originally posted by geoffw
Jerry,

That's very worth while doing- use a Line of Credit (LOC) to get the deposit for your next property. I’ve done that before.

You are really using your PPOR as security for the LOC, so it’s not completely out of the equation. But it does avoid a direct cross-collaterisation, and if you borrow more than 80% for an IP, mortgage insurance will only be charged on your IP, not on IP plus PPOR if you cross-collateralise.

You’ll typically not be allowed to borrow over 80% of the value of your PPOR.

Thank you geoffw, Kathryn, Jude H, brains and Kevmeister.

Few more questions:

1. Say I used my house as a security for LOC and only used LOC for deposit for my next property, for example the new property will cost me $200,000 + $15,000 other expenses (stamp duty, legal etc). So, I take $35,000 from LOC to pay the deposit and other expenses. Where do I get $180,000? do I get it from the same bank or would I have to go to another financial institution? If it is the same bank, wouldn't they still want to use my house as a security?

2. Does it really matter if house was used as a security for LOC, if I cannot repay for some reason wouldn’t bank take the whole house?

3. If I used my house as a security for LOC and then sold the house, does it mean that bank does not have security any more?

 

[Jas]

Originally posted by h8dk97

1. Say I used my house as a security for LOC and only used LOC for deposit for my next property, for example the new property will cost me $200,000 + $15,000 other expenses (stamp duty, legal etc). So, I take $35,000 from LOC to pay the deposit and other expenses. Where do I get $180,000? do I get it from the same bank or would I have to go to another financial institution? If it is the same bank, wouldn't they still want to use my house as a security?

You can go the same bank for the extra 180k, or a different. Generally, banks are nicer if they are trying for first time business, not repeat business.

If you do use the same bank, they can try to grab your PPOR as security as well, but if you specific only the one IP as security, you should be ok. BUT, CHECK THE CONTRACT... The banks have been known to slip in an extra security or two.


2. Does it really matter if house was used as a security for LOC, if I cannot repay for some reason wouldn’t bank take the whole house?

not sure what you're asking here. If you default on the loan, the bank will take the security, sell it, take back the loan amount and give you the rest.

Issues with x-coll are more to do with expanding, refinancing and so on. That's when x-coll gets tricky. OTOH, if you have lots of little places, and can only pull 5k from each, x-coll is a good way to bunch them together and get more. It all depends on the strategy.


3. If I used my house as a security for LOC and then sold the house, does it mean that bank does not have security any more?

Yes, you would have to replace the security under the LOC.

Jas

 

[Kevmeister]

Hi Jerry,

If you want to buy a $200K property with $15K costs then the bank may only commit to 80% LVR on that property, leaving you to come up with a $40K deposit + costs.

Anyway, going with your example of $35K. Yes the $35K comes out of your LOC, which is secured by your PPOR.

The other $180K you apply for a loan for the IP in the regular way, and the IP acts as security for that portion of the loan. It is important to realise that even though the moneys to fund the IP have come from two sources, you have not cross-collateralised because only one IP acts as security for one loan.

Whether you'll get the loan depends on your ability to service the debt.

"Does it really matter if house is used as security for the LOC?" I don't think you will get a LOC unless property is used for security. I can't imagine a bank giving you a $100K+ LOC without security.

"What if I sell the house" Since the LOC is secured by a mortgage, when you sell the house the proceeds are first used to pay out any existing mortgage, which would include the LOC amount outstanding. The bank does not end up in a situation where it has an outstanding loan, and no security for it. Many banks offer transportable home loans, so perhaps it is possible to move the loan/LOC to another property quite easily (not sure about that one, though).

 

[h8dk97]

Thanks All for replying.

I am just curious, if I use my LOC to deposit money for wrap house (asuming the LOC is with NAB and they do not want to finance wrap deals) and 80% of loan with a "wrap friendly" bank. Could I do it? or would I still get in trouble with NAB for using LOC (only 20% of the house value) for wrap?

 

[XBenX]

You can spend the balance of your LOC on candy if you like