Taking the plunge and getting first IP

Hi all,

Was wondering whether I could get some advice from all the pro's out there, I've been interested in investing in property for about the last 2 years and have read countless threads in the last 12 months here on Somersoft, so feel like I have a pretty good idea of what to do, but thought I'd lay it all on the line here and see what people think.

I have a reasonable salary for my age (~$100k for 23 yr old) and have saved up roughly $25k (5% plus fees) for a deposit on a property in perth around the $300k mark.

I've had meeting with a family friend who is a broker and works for a reputable home loan firm who suggested I go for a P&I loan even though the property will be an IP from day 1, in order to lock down some equity for when I look at buying another property in a couple of years.

From what I've gathered on this forum, wouldn't it be better for me to go for an interest only loan with an offset account, putting all my extra cash in the offset account to decrease interest repayments. Then in the future I can simply use this money in the offset account as a deposit and the whole IP loan will still be deductible no matter what I use the offset money for?

My broker has suggested that if I need a deposit, simply redraw the amount from the P&I loan and use that as a deposit, but if I bought a PPOR with that money, wouldn't that mean only a portion of the IP loan would now be deductible? Also that wouldn't that be introducing cross-collateralization?

I trust this broker as he has spent all his career in the banking industry, but a little voice is nagging in the back of my head telling me this isn't right..

If anyone could comment or give any suggestions it would be much appreciated :)
 
I trust this broker as he has spent all his career in the banking industry, but a little voice is nagging in the back of my head telling me this isn't right..

If you want advice on how to spend your career working in the banking industry, he sounds like the "go to" guy. take his advice.

If you want to be a successful investor, listen to those who are, themselves, successful investors.

The first thing I would ask any broker would be how many IP's they have (or the value of their portfolio) and how long they have been actively investing.
 
Listen to the little voice in your head. Paying interest only and putting your savings into an offset account will be far more flexible for different scenarios in the future, especially when taking potential tax issues into account. Your scenario of purchasing a PPOR is spot on.

You can't simply redraw P&I repayments. In the P&I scenario, the limit on the loan reduces with each payment. If you want to increase that limit again, you need to reapply for it.

The structure suggested to you doesn't necessearily mean the next loan would automatically be cross-collateralised, but it does lean in that direction. Given the advice so far suggests a lack of real investment experience, cross-collateralisation would also likely be suggested in the next deal.

I'd suggest talking to another broker. A career in banking isn't a bad thing, but it doesn't always mean that person is good with investment lending advice. A reputable firm may simply be one that has a lot of first home buyers for clients. In my experience very few brokers or bankers truely understand loan structuring for investment properly.
 
Offset with interest only is a good strategy in the vast majority of cases. However, P&I can be better if you aren't a good saver and require the 'forced' saving of paying the principal off each month.

I am not sure what your family friend / broker told you but paying off the principal to create 'equity' is, in of itself, a false economy. You are just putting your own cash into the property and that equity is just your own money, not anything else. You can't redraw it anyway unless you pay more than the minimum repayments. True equity only comes when you've bought well and the property goes up in value.

Having said that, if you are going for a 95% lend (Which you seem to be envisaging), you are limited in the type of products you can get. Many 95% lends are strictly for owner occupied properties only rather than investment properties, and those that allow investments may not allow you to have interest-only at all. So it all depends, and the question of having an offset/interest-only may be moot.
 
You should call Peter from Sage Lending in Victoria, he invests a lot of time and energy into making sure the Lego blocks are structured correctly.
 
You should call Peter from Sage Lending in Victoria, he invests a lot of time and energy into making sure the Lego blocks are structured correctly.

Thanks Jake, I do have the best Leggo blocks in town!

Seriously, not kidding about the leggo...
 

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+1 for Pete.

You need to have confidence in the person you're dealing with. I'm sure you'll get that from Pete.

Cheers

Jamie
 
Offset with interest only is a good strategy in the vast majority of cases. However, P&I can be better if you aren't a good saver and require the 'forced' saving of paying the principal off each month.
This... Like you've probably read countless times, everyone's circumstances are different - My wife is a great saver but I'm shithouse so we cope with the extra $ for P&I knowing that it's not being spent (me: at the pub | her: nice restaurants)
My $0.02 :)
 
Hi Sammyk

I'm relatively new to investing too...couple of IP's, 2 years down path to long term goal. The reason I feel compelled to answer your post is that basically I have come to realise the finance side of property investing is a MAJOR part of being a property investor. Since deciding to buy IP's I have found myself spending A LOT of time learning about finance and how to keep yourself moving forward with each purchase. It really helps to have your end goal identified e.g why are you investing, how much money will you need to retire or quit work, what does this translate into in terms of how many properties to buy, when to buy them, purchase price of properties. This helps when speaking to finance brokers because they need to be able to help you structure finances too allow you to buy that many properties. This means lending from the heirarchy of banks at different times on your journey, using different types of loan products etc etc. Unfortunately if you start out going blind you might end up with a bank or product that limits you for additional purchases down the track. Can be fixed but is a lot more work.

Goodluck with it and good on you for taking the first step!
 
Thanks for the replies everyone, I'm glad that voice in my head wasn't totally wrong!

I am a pretty good saver so that's not really a problem, will delve a little further into the available possibilities...

thanks again
 
I trust this broker as he has spent all his career in the banking industry, but a little voice is nagging in the back of my head telling me this isn't right..

and therein lies the issue

if you have a dicky tax problem would you go to the ATO for advice ?

or if you had someone suing you, would you go the other sides legal rep to get advice.

Never ceases to amaze me that we allow bank trained staff to become brokers without retraining.

  • A banker is the agent of the bank.
  • A broker is supposed to be the agent of the borrower.


Many ex bankers do make excellent brokers because they know that lenders process and credit criteria really well. However, in my experience, that only happens when they UNLEARN the "maximum contribution" training and learn to structure and work to the borrowers need.


ta
rolf

PS yes Brady its my hobby horse again : )
 
This... Like you've probably read countless times, everyone's circumstances are different - My wife is a great saver but I'm shithouse so we cope with the extra $ for P&I knowing that it's not being spent (me: at the pub | her: nice restaurants)
My $0.02 :)

perfect. For peoples such as this an accelerated PI schedule is often useful, IE have 15 year loan rather than a 30 year loan.

ta
rolf
 
This... Like you've probably read countless times, everyone's circumstances are different - My wife is a great saver but I'm shithouse so we cope with the extra $ for P&I knowing that it's not being spent (me: at the pub | her: nice restaurants)
My $0.02 :)

perfect. For some miners on big income for only a shorter time an accelerated PI schedule is often useful, IE have 15 year loan rather than a 30 year loan, but that has hits own risks


ta
rolf
 
Are you living in the property first, or is it becoming an ip straight away?

In my situation, I had to go p and I for my property, because it was my ppor first, and was the only way I could get a larger loan, even though I had a large deposit.

A year later I converted it to an ip, and did an equity release and converted it to interest only.
 
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