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From: Ashley Jessen


Just wanted to ask a quick question...I have an agent who is trying to get me a pre approval from the bank in regards to how much I can actually borrow.

His ulterior motive is to get me to purchase one of his off the plan properties that are extremely highly priced and I was just wondering whether I should be taking this track or should I just apply through a bank or a mortgage broker.

thanks
Ashley
 
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Reply: 1
From: Michael G


Ask him for a free independent valuation when you get the pre-approval :)

Michael
 
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Reply: 2
From: Rolf Latham


Ashley

Brokers marketing property is one thing, but real estate sellers also arranging finance is not always the best thing to do.

If you are going with this scenario two things:

1. As MG has suggested, get YOUR valuer in.

and

2. See if the property will stand up to a
95 % interest only Investors loan on its own security. That usually sorts the overpriced stuff out pretty quickly.

Regards



Rolf
 
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Reply: 2.1
From: Michael Nocella


Rolf.Could you tell me more about this investors loan (95%) own security etc.Never heard about it.Very curious.

Cheers Michael
 
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Reply: 2.1.1
From: Rolf Latham


Micheal

When Buying an IP with equity rather than cash there are two ways you can provide a "deposit". One is to allow your bank to take a second mortgage on your home (also called a collateral mortgage).

Another way is to set up a loan structure so you actually physically transfer equity from your home to your IP as deposit.

In doing so you have three advantages over the first scenario.

1. You limit your exposure to the IP to 5 % + costs (and not your entire home equity)

2. You are not limited to the same lender as for your home, since the IP can be self securing on a 5 % deposit,.

3. Because the property has its own "legs" (its loan has no other security other than a first mortgage over the IP) you can usually be sure that if the property is grossly overpriced that the Lenders Mortgage Insurer will bounce the deal. Thi might sound like a hassle, but it is a blessing in disguise and has just saved you 10 to 40 k.

Hope this helps

Ta


Rolf
 
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Reply: 2.1.1.1
From: M D


Dear Rolf,

Isn't it better to use our equity instead of putting our own cash in for each IP we buy? Being new here, can someone please explain why people seemed to prefer not using their homes as collaterals. It is not like we are using our homes for business loans here?? I don't quite understand the preferences in using LOC. Like someone has mentioned before, the bank takes into account the LOC you have and that affects your borrowing capacity. Do I make sense? Would appreciate any feedback.

May
 
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Reply: 2.1.1.1.1
From: Les .



G'day May,

To me, the main reason to keep the own home "out of it" (no cross-collateralising with IP's) is simply because of "what if"...

What if you owned your own home, and 2 IP's (say, each one worth $300k). You'd borrowed against your own home and linked one loan to another (cross-collateralise).

Life goes on, you pay down your home mortgage, but leave the IP's at I/O, and don't pay them down (why WOULD you?). Then the unthinkable happens - you lose your job, can't pay all the bills, the Bank comes looking ... and finds 2 IP's mortgaged to 90%, but a home which is linked has had mortgage paid off, so the LVR is down to 60%.
Since the Bank can choose, which one is guaranteed to get them all their money, even if the RE market is down?? Yep - you guessed it !!!!

So they sell YOUR HOME, and you find a big car to live in .... Because they were linked, it became the Bank's choice !!!! And their choice had little chance of agreeing with YOUR choice, given the circumstances.

By all means borrow against your own home - through a DIFFERENT lender - and keep it separate from all other IP's (link the IP's together if you need to).

Hope that helps,

Regards,

Les
 
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Reply: 2.1.1.1.1.1
From: M D


Hi Les,

Thanks for your reply.

I think I need more info regarding the bit about borrowing via a different lender and keeping it separate from other IPs.

My situation is, presently, our home worth $160000 has $30000 owing. This home loan with Bank A has the redraw facility which we can access $85000 any time we want. We went to Bank B to apply for multiple IP loans and this bank suggested we leave Bank A and we refinance our home loan with them for $30000 and all IPs we wanna buy, we will use our home's equity,in other words, link our home with the IPs. After your explanation I have qualms about using our own home as collateral. Can you please suggest what other alternative we have? I don't understand LOC very much and all the reading from the forum archive only confused me in regards to my own situation. At the moment I understand the LOC incur higher interest rate charges and also the bank takes it into account when they assess your borrowings. Also I was told the tax department may change their view regarding the interest from the LOC.

I hope you can help me further with any advice you can give. Others with any opinion, please do jump in. This beginner needs assistance from all you experienced people out there. Thanks!

Regards,
May
 
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Reply: 2.1.1.1.1.1.1
From: Michael G


Hi,

Okay the fundamental thing you need to understand about borrowing are the terms "security" and "collateral" which are basically the same for this discussion.

Banks will lend you any amount of money for pretty much anything, as long as their risk is pretty much zero.

How do they reduce risk and protect themselves?

Well they do this by holding something in return for lending you money.

This something is called "collateral" which the banks take as "security" to cover their risks.

Now the thing to keep in mind is that lenders want ZERO risk. That means, if you default on the loan, the banks want some want to recover their money. They do this by selling off your security.

For investors this is normally property. Lenders aint a patient lot either, so they want they cash ASAP. So your "collateral" will be auctioned in a fire sale.

Now the lenders know this from the start, so they lend based on the value of your property in such a sale. Which is why the value it lower than FMV (fair market value) most of the time (especially when the market is flat).

Another thing is they want to ensure that their loan PLUS their selling costs are covered.

What does this mean?, well selling costs are maybe 5% of the value of the property and if they have to sell in a hurry then they may need to sell 10% below market.

This totals 15%, so they want to ensure that your "collateral" will cover the loan + 15%.

So on our $100k property, you have to come up with at least 15% (which is the deposit).

This ratio between the money they will lend and what you have to pay out is called the LVR (loan to value ratio).

Lenders by default have LVRs of 80%. Which gives them 20% cover of all their costs above and beyond the loan.

You can borrow higher, but you need to take something called mortgage insurance.

This is a policy which you pay for that protects THE LENDER, NOT you.

What happens is if you default, the banks sells your property, if they lose out, they claim against their mortgage insurance policy. The insurer pays the bank their difference. THEN THE INSURANCE COMPANY COMES AFTER YOU FOR THE MONEY.

And LVRs change depending on where you buy and what you buy.

Rural, metro, residential, commercial, its all different.

So if you have "equity" (the difference between what you owe and the value) in a property a lender will take this "collateral" and use it as "security" so that the total LVR (loan to value of properties) is below their limit.

This is a simple calculation of adding up the value of all your property and dividing it by the total amount of all your loans.

The reason why the banks want you to refinance is simple. They want you to pay THEM the interest payments, not you competitors. Also if you cross collaterise, lenders dont like being second in line when you default. But this is a difference case with LOCs (line of credit)

Why?, well LOCs typicaly have an lVR of 80% which means you can draw down money up to 80% of the value of your property.

A LOC is line a big credit card. Interest is calculated daily based on the outstanding debt. Quite often LOCs are even accessed by credit cards anyway. The danger with LOCs are that people buy DOODADs with the money and not assets. So they rack up debt for cars and holidays and not into stuff which actually HELPS them pay back the debt.

With an LOC you can draw down the money and because its CASH you can use this anywhere. Even for a deposit on a loan from another bank. The 2nd lender doesnt care where the money came from because if you default is has this cash to recover with. Its the 1st lenders problem whether you pay back your LOC debt or not.

So with an LOC you can draw down and take out loans with anyone. But if you have to put up your equity as security (cross collaterise without an LOC) then you will more than likeley have to do it all with one lender.

And why do people like LOCs, besides the higher cost of interest (which is an opporunity cost), investors are free to borrow from different banks.

You see besides everything else, lenders get nervous when you borrow too much from them, the unspoken limit is around 5 properties. Once you have 5 properties with a lender, borrowing more becomes difficult, not because of the deal you present, but because of their internal policies. So with an LOC you can draw down, and just borrow from somewhere else, with the need to refinance all the time.

How's that?, does that info help?

Michael
 
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Reply: 2.1.1.1.1.1.1.1
From: M D


Hi Michael,

Your post helped greatly! At the moment I am trying to absorb it all.

So, do I open a LOC account specifically for buying IPs and still have my current home loan now owing $30000(with the intention of paying it off as soon as possible) This 2 loans would be with Bank A.
Then I go to Bank B and borrow 80% of the IP's value and contribute the other 20% plus cost via the LOC with Bank A,if I don't use mortgage insurance. (What I need to know is:-Is the interest from the LOC treated the same as interest from the IP loan? Also, how would Bank B assess your borrowings now? Do they(Bank B or other future lenders) lend you money on multiple IPs as long as you can come up the the deposit each time or do they still need to assess your financial situation as a whole by looking at your loan commitments with Bank A on top of all the other IP loans you have? . If this is the case, the DSR will be affected and you can't borrow for even more IPs. I am unsure about this aspect so would appreciate if you can offer more info how my loans can best be structured.)
I hope I am not asking too much.

Thank you very much.

Regards,
May
 
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Reply: 2.1.1.1.1.1.2
From: Rolf Latham


Hi May

MG has it pretty much covered.

Suggest you get yourself a good independant broker.

She/He will be able to clearly outline the pros and cons and show you ways to save money that the banks and a lot of accountants do not know about.

Ta

Rolf
 
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Reply: 2.1.1.1.1.1.3
From: Rolf Latham


Hi May

MG has it pretty much covered.

Suggest you get yourself a good independant broker.

She/He will be able to clearly outline the pros and cons and show you ways to save money that the banks and a lot of accountants do not know about.

Ta

Rolf
 
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Reply: 2.1.1.1.1.1.1.1.1
From: Michael G


Hi again,

You can open a LOC for anything you want. But you better know what you're borrowing the money for because you can only claim a deduction for the interest if the loan is for INCOME PRODUCING purposes.

So if you want a LOC for buying a car, you better have a seperate one for IPs, because it will be easier to determine the interest if the non-deductable and deductable are in seperate accounts.

Actually that's a real beef of mine, these people who say you can save 40% of your loan. What they fail to say is this only works well if you have a owner-occupier loan. Why?, because the home loan and the debt racked up on a credit card is both non-deductable and therefore easier to determine what is deductable ie NOTHING.

Most lenders eyes glaze over when I explain I rent, I dont have a owner occupied home. All my debt is INCOME PRODUCING, how the hell do I calculate the percentages on the interest rate, which portions of my loan starts getting used to pay the credit card, which they want me to use for living expenses.

Does any broker here know of a lender which actually does a split statement tracking this stuff. That is without a split loan facility?. as they tend to be rigid, ie if I have a $100k loan and say $5k is for living,then anytime I use less than $5k, I waste some interest which cannot be claimed as a deduction.

But back to your question.

Everytime you take out a loan, the banks will access your TOTAL affordability, regardless of where your debt is. This includes all credit cards.

As for the interest on the LOC, its deductability depends of what you use it for. If you draw down to use it as a deposit for a property (or to buy shares, or even a business) as long as the purpose is for income, then its deductable. But if its for a holiday or car, then its just like you owner occupied home, that is NOT DEDUCTABLE.

A good broker will assess your current situation and you proposed situation and determine what will be the most cost effective.

Note: some brokers get paid based on the size of the loan they handle. For some, its in THEIR best interests if you refinance ALL your debt to a bank. Why? well they dont get any commission for the debt you currently have at Bank A, only for the new amount you take out at Bank B. But if you refinance the old and new debt with Bank B, then their commission MAY be calculated of this higher amount.

When a broker presents something to you, and if the interest rate and terms are THE SAME for Bank A and B and there's to problem with collateral (mainly with an LOC), then where's the benefit? especially if there are break costs involved. If there's no benefit to you, then to who's benefit is the move for?

Something to think about.

Michael
 
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Reply: 2.1.1.1.1.1.3.1
From: M D


Hi Michael & Rolf,

Thank you both for your replies.

Rolf, I checked out your web site and am disappointed to see that I am not from the same state as you. I am from Perth.

If there is a mortgage broker from WA out there, reading this forum, please contact me.

Regards,
May
 
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Reply: 2.1.1.1.1.1.3.1.1
From: Rolf Latham


May

I can refer you to someone from my network - there is 420 of us Aus wide, incl Perth

Ta

Rolf
 
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Reply: 2.1.1.1.1.1.3.1.1.1
From: Russell H


hi rolf - any recommendations for GOOD broker in Melb ( see, I am learning!)

r
 
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Reply: 2.1.1.1.1.1.3.1.1.1.1
From: Rolf Latham


Hi Russel

Please mail me on rlatham@asapfinancial.com.au with what you wish to achive and I will certainly point you in the right direction

Ta


Rolf
 
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Reply: 2.1.1.1.1.1.3.1.1.1.1.1
From: James Doherty


DO NOT under any circumstances let the real estate agent know what you can borrow. You will have no bargaining power.....it is just a good way for him to find out how much more he can RIP YOU OFF.

Jamesd
 
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Reply: 2.1.1.1.1.1.3.1.1.1.1.1.1
From: Delia L


James is right! Not only that, pre-approval shows on your CRA report. It doesn't look too good if you go to several lenders and each lodge a CRA check and in no time you look like someone trying to get money everywhere. Lenders don't like it, do they, Rolf?
On the other hand, if you are really keen on the units, you could use it to your advantage. Say get a pre-approval to the amount that you want to pay for the unit, not the amount the agent want and use it to bargain the price. Again, don't go thru the agent's bank, use your own. That still show up on your CRA report though.

Delia
 
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