Pay PPOR Loan or Just Use Cash for IP1 Deposit?

[azzae89]

Hi,

I bought a PPOR back in 2013 and have my mortgage with ANZ. I currently owe $400K on it and my interest rate is approx 5.2% ($100K variable and $300K fixed).

I had a re-val done in December 2014 and it came back at $500K, meaning I have $100K equity ($80K usable).

Anyway, I have recently sold a business of mine and suddenly have $35K in cash to add to this.

With all this equity / cash floating around I'm set on buying my first IP, but not quite sure how best to approach it.

A few questions:

1. With interest rates being so low, should I refinance to get away from ANZ's ~5.2% rate to something more like ~4.3% (uBank and some others are close to this). I've worked out this could save me approx $5K per year.

2. If I were to buy my first IP, should I pay the $35K onto my loan, then use that equity as security? I.e. putting that money on my mortgage would not only reduce my monthly payments but I could still get my IP.

3. Or do I keep these things separate, and just use the cash as deposit for my IP? I'm looking at buying a 2 bed unit in Wollongong at approx $350K so $35K should cover 5% deposit + costs.

I think either way I want to achieve 2 things, refinance to a lower interest rate, and buy my first IP.

Any help would be great.

Thanks!

 

[tobe]

Refi $400k, and split out another $80k or whatever is possible depending on the val, as deposit for the investment property. Get another 80% loan secured by the investment property only to complete the purchase.

Put the $35k into the offset account linked to the original $400k loan.

 

[Brady]

Don't use cash, it's not deductable. FUunds into the PPOR then taken back out for IP means deductable (debt recyling).

ANZ will give you a better rate next time you deal with them should be circa 4.5%

Keep things seperate, no x-coll.

Use a banker or broker you can trust, if they don't know what x-coll is don't use them. If they can't get you a rate of <4.6% don't use them. If it takes a long time for response, dont use them.

Think long term what your plans are around buying 1IP or 10IP. Might be worthwhile going harder now, taking on some LMI, keeping funds avaialable for more purchases. Discussion with your broker/banker should be around your future goals and making sure they can assist.

 

[Redom]

Hi,

I bought a PPOR back in 2013 and have my mortgage with ANZ. I currently owe $400K on it and my interest rate is approx 5.2% ($100K variable and $300K fixed).

I had a re-val done in December 2014 and it came back at $500K, meaning I have $100K equity ($80K usable).

Anyway, I have recently sold a business of mine and suddenly have $35K in cash to add to this.

With all this equity / cash floating around I'm set on buying my first IP, but not quite sure how best to approach it.

A few questions:

1. With interest rates being so low, should I refinance to get away from ANZ's ~5.2% rate to something more like ~4.3% (uBank and some others are close to this). I've worked out this could save me approx $5K per year.

Yikes that rate is a bit out of line. I'd call ANZ and ask for an 0.9% discount, its pretty standard on your loan size. That should bring the rate down to 4.73%.

They have a great cash out policy and are a good lender to use early - i'm not sure whether refinancing to an online cheapie is best. Is this a set and forget, or do you plan on continuing to invest?

Also consider that you'll pay a break fee on the $300k portion of your loan.

2. If I were to buy my first IP, should I pay the $35K onto my loan, then use that equity as security? I.e. putting that money on my mortgage would not only reduce my monthly payments but I could still get my IP.


No, best to use the borrowed equity (the 80k) to fund the deposit and closing costs of the investment property. This should mean the properties interest is fully tax deductible.

3. Or do I keep these things separate, and just use the cash as deposit for my IP? I'm looking at buying a 2 bed unit in Wollongong at approx $350K so $35K should cover 5% deposit + costs.

Just put the 35k in the offset of your original loan.

Note, if you go to ANZ again, your overall rate discount should increase to about 1.08% or a 4.55% rate (at least) - just make sure they don't cross securitise your assets.

I think either way I want to achieve 2 things, refinance to a lower interest rate, and buy my first IP.

Any help would be great.

Thanks!

Answers in bold mate - you may not need to refinance just to get the cost down, should bring it much closer by simply putting through a pricing request (broker can do it for you) or if you give them a call direct and tell them your refinancing.

 

[azzae89]

Thanks for all the help guys you are awesome!

Looks like I will call my broker at ANZ and negotiate a better rate for the $400K.

I'm still a bit hazy on how equity is actually accessed on my PPOR. Let's say I got the green light on $80K in usable equity. How does this work? Would it be transferred to my personal account as cash and my loan size increases from $400K to $480K?

And then I start a separate loan with that $80K to avoid x-collateral?

Sorry I have no idea

Thanks!

 

[Redom]

Thanks for all the help guys you are awesome!

Looks like I will call my broker at ANZ and negotiate a better rate for the $400K.

I'm still a bit hazy on how equity is actually accessed on my PPOR. Let's say I got the green light on $80K in usable equity. How does this work? Would it be transferred to my personal account as cash and my loan size increases from $400K to $480K?

And then I start a separate loan with that $80K to avoid x-collateral?

Sorry I have no idea

Thanks!

Set up a separate loan for the investment equity. So you'll end up having 2 loans.

300k that you have now (that's part variable/fixed).
80k that's for investment purposes. The funds will just sit in the loan and will be used when your ready to purchase.

Then you'll also have a completely separate loan for 80% of the new IP ($280k).

Make sure that the new separate loan ONLY has one security against it. Triple check your loan documents, don't take your bankers word for it.

Cheers,
Redom

 

[Greg Reid]

Did I miss something, valuation $500k, loan $400 = 80% LVR.
With the fixed portion, you are stuck until the term is up but you should get a better rate with ANZ for the variable portion, so push hard but recognise they know you are with them because of the fixed loan.

Putting in the $35k into the loan and redrawing it equates to a new purpose so it could be used to part fund the IP. You need to balance increasing your current ANZ facility above 80% and cop the LMI as to the cost equation for LMI on the IP. There is a point that minimises your LMI costs or you wait until your PPOR increases more in value and/or savings increases.

I would be very reluctant to use ANZ to cross securitise as the resultant LMI may well be higher than keeping the lenders separate but investigate and see for yourself.

Good luck with it.

 

[Redom]

I would be very reluctant to use ANZ to cross securitise as the resultant LMI may well be higher than keeping the lenders separate but investigate and see for yourself.

Good luck with it.

Can stay with ANZ, just ask them to not cross collateralise. The upside is you'll get greater rate discount by taking out another 300k worth of debt with them, and their a good lender to use early.

Just be sure to have some buffer in your serviceability with them, otherwise you may be stuck for future equity releases.

Cheers,
Redom

 

[azzae89]

Did I miss something, valuation $500k, loan $400 = 80% LVR.

Does this mean I don't have any equity to access?

 

[Redom]

Does this mean I don't have any equity to access?

Ah i didnt see that.

It means that you'll have to pay LMI to access any equity, youre already on an 80% LVR. Any additional borrowing will increase that LVR into LMI territory.

You could do a few valuations with different suitable banks that allow upfront vals and see if one comes back higher.

Cheers,
Redom

 

[azzae89]

LMI isn't so bad is it? I paid it on my PPOR I think it was about $4k? The increase in value over 18 months has been way worth getting in at the time I wanted, which I wouldn't have been able to do without a 95% LVR loan and LMI.

So I can still use that $80k then?

Another question, if it's for an investment, how important is current income situation? I'm self employed and though I am making drawings of approx $70k per year I'm wondering if this will be good enough, or how much power rental income holds in terms of serviceability (I guess potential vacancy rate may influence this?).

 

[Jamie M]

Hiya

I wouldn't refinance from ANZ - you've already paid LMI, so if you're doing an equity release that involves LMI, you won't be charged a WHOLE new LMI fee. You'll simply be charged an adjustment fee which will save you thousands.

Do the equity release with ANZ (who are one of the better lenders with equity releases that involve LMI) and ask your banker/broker to request a discount on the rate for you.

Cheers

Jamie

 

[Redom]

LMI isn't so bad is it? I paid it on my PPOR I think it was about $4k? The increase in value over 18 months has been way worth getting in at the time I wanted, which I wouldn't have been able to do without a 95% LVR loan and LMI.

So I can still use that $80k then?

Another question, if it's for an investment, how important is current income situation? I'm self employed and though I am making drawings of approx $70k per year I'm wondering if this will be good enough, or how much power rental income holds in terms of serviceability (I guess potential vacancy rate may influence this?).

Cashing out to 95% lend is very difficult. In your scenario, order a few vals from lenders with good cash out policies and then take out as much as possible at its lowest cost. Probably best to stick to an 88% cash out lend...it keeps the cost low and improves success chances.

With self employed, will need company financials. If 70k is shown as income, then you should be right given rates are low (will likely require a half decent rental yield). You may need to swap banks if serviceability is very tight. Note most banks will want 2 years financials.

Cheers,
Redom

 

[Redom]

Hiya

I wouldn't refinance from ANZ - you've already paid LMI, so if you're doing an equity release that involves LMI, you won't be charged a WHOLE new LMI fee. You'll simply be charged an adjustment fee which will save you thousands.

Do the equity release with ANZ (who are one of the better lenders with equity releases that involve LMI) and ask your banker/broker to request a discount on the rate for you.

Cheers

Jamie

Ah if youve paid LMI already, then the cost of switching becomes pretty high and you lose the flexibility of shopping around for valuations.

 

[Rolf Latham]

Another question, if it's for an investment, how important is current income situation? I'm self employed and though I am making drawings of approx $70k per year .

the drawings per se dont make the servicing by themselves.

for eg, if you company makes a 70 k loss after wages......... you dont have servicability,

Conversely, many lenders will allow you to add retained company profits if you and spouse are the primary shareholders.

Im assuming the business you sold wasnt providing any part of your assessable income ?

ta
rolf