Repayments on your PPOR Mortgage!! - How much per week ?

[Propertunity]

Propertunity,
6. PPOR in a CG area? Potential to grow in near future
etc.etc.
Very curious as to what does that have to do with it?

Well the strategy of using a high LVR of 106% that I was recommending is very highly geared and in my opinion you would not want to stay in that kind of leveraged position for too long. Nor would you want it to deteriorate and be in an even more neg equity position.......so I'd want it in an area of high CG.

Keeps me happy and the MI and the lender

 

[BayView]

Guys,

What do you view as a safe LVR for a PPOR? Mine is only at 83% and I am still trying to work out if I should pay it down further or use that money to fund another IP.

Any views?

Below 80% and falling is safer.

It's a bit of an opportunity cost thing in regards to what you do - pay down existing PPoR debt or buy another IP?

With the IP there is an element of assumption that you will make money and gain equity (in most cases you will).

With the PPoR, it is guaranteed that if you pay down debt, you will gain equity. And you cut down a lot of non-deductible interest.

If you have an IP and a PPoR, you have double the exposure to the market, and this can accelerate your wealth building.

But will it return more than the saving in interest from paying down the PPoR debt? No-one really knows.

My view; if you can buy an IP with only an 80% LVR or less and you still have your PPoR at 83% LVR, then this is not too risky.

To buy an IP with 100% or more LVR with an 80% or more LVR on the PPoR as well is very risky; especially if the IP is neg geared.

 

[murtagh]

To buy an IP with 100% or more LVR with an 80% or more LVR on the PPoR as well is very risky; especially if the IP is neg geared.

Can you outline these risks for me? I'm not sure how the LVR on my PPOR means anything to risk?

Here's what I consider a risky scenario, all using low LVRs:

Starting position:
PPOR loan: 200k
PPOR value: 350k
LVR: 57%
Cash on hand: 15k

Borrow 50k secured by PPOR, to buy IP at 80% (ignoring purchasing costs because I'm supposed to be working) .. so in the end:

PPOR loan: 250k
PPOR Value: 350k
LVR: 71%

IP Loan: 200k
IP Value: 250k
LVR: 80%

Cash on hand: 15k (still)

Now the purchaser loses their job, and their IP goes untenanted for a month or two, and all of a sudden it's not looking like such a safe move.



Compared that low LVR scenario to this:

Starting position:
PPOR loan: 200k
PPOR value: 350k
LVR: 57%
Cash on hand: 15k

Borrow 115k secured by PPOR, and buy IP at 95% (ignoring purchasing costs) .. so in the end:

PPOR loan: 315k
PPOR Value: 350k
LVR: 90%

IP Loan: 237.5k
IP Value: 250k
LVR: 95%

Cash on hand: 117.5k (+102.5k)

How many more months can the IP be untenanted / the purchaser have no job now?


The defining characteristic of "risk" in those two admittedly self-serving scenarios is cash on hand, LVR has very little to do with it.

Can you show me a scenario where LVR actually creates risk?

 

[BayView]

Can you outline these risks for me? I'm not sure how the LVR on my PPOR means anything to risk?

Can you show me a scenario where LVR actually creates risk?

That post was a lot more detailed than the original post, which said the PPoR was at 83% LVR, and in the last post the PPoR LVR changed to 57% and then 71%.

Where did the $102.5k cash on hand come from? What did I miss? The only cash on hand I saw was the original $15k. There is no other cash on hand - as far as I can tell; it's all borrowings other than the $15k.

And, you can't not include purchase costs. They are a real cost, and they are either paid for with cash, or borrowings.

Anyway, with the scenario of risk with LVR's - it's a bit general, but basically, the risk is when you are forced to have to sell due to financial difficulty.

For most people, this is going to result in a sale below the market value of the day in order to get a quick sale.

It would be fair to say that you would most likely have to sell for 80% of the value of the property. You may get more, but there's no guarantee. Often you get less if you are really desperate. If you don't sell; the Bank steps in, and the control is gone. The Bank will sell to redeem their funds.

So, if you have 2 properties - an IP and a PPoR, and the PPoR is at 80% LVR and the IP is at 100% LVR, then in the event of a fire sale, you would sell the IP first I'd reckon. Most people would.

So now you have 20% of the IP debt still outstanding after you sell it for 80% of its value - this is transferred to the PPoR debt, and its LVR jumps up to somewhere around 90% LVR as a guess.

If the financial difficulty is protracted, you may also have to sell the PPoR as well. Now there's risk.