Use savings or draw Equity?

Hi All,

Dilemma!

I have just been told that my entire LVR position is 73%, and was advised by broker to top up to 90% to use for deposit on two new houses, which means I can draw approx. $80,000.

Now, I can either use my saving which is $50,000 and use as minimal amount of my LVR as possible to keep it low or I can use the minimum amount from my savings and place it in an offset account against one of the houses.

I am split on the decision, this is the first time I am doing anything like this and I am wary of a misstep.

Obviously the thing here is, using up the entire equity upto 90% means I have to make greater repayments every month on my existing properties, including the new acquisitions, but hold onto my savings...or I can use all of my savings keep my current repayments as small as possible.

I know what you are all going to say, it depends, but since you are all far more experienced than I, just wondering what the general consesus is here in regards to this with a goal of building a large real estate portfolio.

Kind Regards
 
What a good dilema to have!!!
Me, I would use equity, take IO with offset, and set the $50K in the offset. For most lenders, this will reduce the minimum repayment amount to what it would have been if you had used savings for the purchase.
Works from a tax point of view, and theres nothing better than having $50k in the bank to help you sleep at night.
 
How easy does your broker think it will be for you to go to 90%

I'm looking at just going to 80% but 90% opens up a whole other set of options :)
 
Drawing on equity is the more riskier option but it also gives you greater rewards should the market rise. The $50K savings in the offset account surely would assist in mitigating the risks of drawing down equity.

I would go with the drawing equity option. But at the end of the day it would depend on your risk profile, your end goal and how far you are from that goal.

Hope that helps..

Cheers,
Oracle.
 
Thanks guys I think you are all right. I'm just a little nervous but I just wanted to get some confirmation.

And yes, my broker is currently doing the paperwork for 90% draw of equity.
 
A golden rule is to never run out of money! Maximise your access to credit at all times - you never know when you may need it. It's when you really need it that it's the hardest to get!

With IO loans and an offset it doesn't matter anyway - you are still paying the same amount in interest. One scenario you have more money available and with the other you don't.

The real difference here to me is you are going to 90% which will mean extra LMI. You need to weigh up whether the extra LMI you will pay to access that equity is worth the SANF it will give you...
 
The real difference here to me is you are going to 90% which will mean extra LMI. You need to weigh up whether the extra LMI you will pay to access that equity is worth the SANF it will give you...

And how much that LMI will cost you over 5, 10, 15 or more years.
 
Hi All,

Dilemma!

I have just been told that my entire LVR position is 73%, and was advised by broker to top up to 90% to use for deposit on two new houses, which means I can draw approx. $80,000.

Now, I can either use my saving which is $50,000 and use as minimal amount of my LVR as possible to keep it low or I can use the minimum amount from my savings and place it in an offset account against one of the houses.

I am split on the decision, this is the first time I am doing anything like this and I am wary of a misstep.

Obviously the thing here is, using up the entire equity upto 90% means I have to make greater repayments every month on my existing properties, including the new acquisitions, but hold onto my savings...or I can use all of my savings keep my current repayments as small as possible.

I know what you are all going to say, it depends, but since you are all far more experienced than I, just wondering what the general consesus is here in regards to this with a goal of building a large real estate portfolio.

Kind Regards

The big mantra is to put as little money into the deal as you can and use OPM. Sounds great, and I've done that a number of times.

But you need to be realistic; no point putting "no money down" when you have some to put down if you are going to be in a hi risk position.

A very important rule to remember is CASHFLOW.

If, by using equity, you are going to be significantly neg geared, and have little extra funds available to you should a problem arise, then use the savings.
 
Good Risk management practice would suggest you transfer some of your investing risk.

The cost of the Lenders mortgage insurance here is depreciable over time, and as this is possibly a small cost to pay in real terms

What we dont know, is do you still have any PPOR debt, and the source of the 50 k. If yu have PPOR debt, and the 50 k is tax paid savings, in that case your question is likely a non decision.

Youd have to take 90 on the IP, and retain your cash against your non ded PPOR debt.

As always there is a fair bit of soft data that we cant see so this idealogy may not be appropriate.

ta
rolf
 
Have you factored in interest rate rises? With 90% LVR you don't have much room to move when interest rates rise.
I've seen people in this position who have had to sell properties to service debt. I would never go to 90% LVR (but I err on the cautious side).

Everyone has their own SANF.
 
Hiya

On the increased borrowings, I dont believe Daniel is talking about burning his 50 k thta he holds as cash. Rather as advised by others to borrow the extra, and then place the 50 k against offset.

Thus his cashflow wont be affected much ( and should only be the amount of the capped LMI premium if he goes that way)

I would have thought in times of rates concern and employment certainty, holding back 50 k of your own dough for buffer or opportunity would be a good thing .......?

ta
rolf
 
I have a similar dilema.
Overall LVR < 70%
Refinancing 2 out of 7 properties and have the option of doing the re-fi of those 2 at 90% which will give me a lot of extra cash in the bank (compared to an 80% lemd), some of which can be put aside to cover rate rises, to fund anther purchase.
However, doing so will only increase my overall LVR slightly.
I like to think I'm not too risk averse, but I'm not sure I'd be comfortable taking my overall LVR to 90%.
As has been mentioned already, you don't have much "wriggle room" when rates move up.
 
As has been mentioned already, you don't have much "wriggle room" when rates move up.

Rob are you referring to the extra purchase here or the re-fi? The first I can understand but the second makes no difference as your net debt you pay interest on is still the same (IO with offset) - it is only your access to cash that improves.
 
Rob are you referring to the extra purchase here or the re-fi? The first I can understand but the second makes no difference as your net debt you pay interest on is still the same (IO with offset) - it is only your access to cash that improves.

True, if the cash just sat in an offset, then rate rises would have little impact on the extra borrowing.
Once it goes to into another deal, that's another story altogether.
In my case, the re-fi is primarily about financing another deal and using some of that money as a buffer.
 
True, if the cash just sat in an offset, then rate rises would have little impact on the extra borrowing.
Once it goes to into another deal, that's another story altogether.
In my case, the re-fi is primarily about financing another deal and using some of that money as a buffer.[/QUOTE

So what's the best strategy here? I have no PPOR debt, I have no debt other than my IP loan debts.

I am now thinking of topping up both houses to 90% lvr but not to actually use it, I will use upto 80% to not trigger LMI and use part of my savings to supplement the costs involved in purchasing the house and place the rest in the offset account.

How do I calculate what my LMI will be?
 
I just did some calculations, LMI to go to 90% is only $2000. That isnt much at all when you think of the advantages of using the extra money to acquire assets, so I dont see the big deal in this respect. Can anyone enlighten me?

Also, isnt LMI a one off payment? I dont believe you need to pay again right?
 
I just did some calculations, LMI to go to 90% is only $2000. That isnt much at all when you think of the advantages of using the extra money to acquire assets, so I dont see the big deal in this respect. Can anyone enlighten me?

Also, isnt LMI a one off payment? I dont believe you need to pay again right?

LMI is a one off payment. If you're happy with that amount and aren't going to go spending the extra you've borrowed then I agree you may as well borrow more and keep the balance in an offset until you need it for the next investment... but that is just what I have done.
 
LMI is a one off payment. If you're happy with that amount and aren't going to go spending the extra you've borrowed then I agree you may as well borrow more and keep the balance in an offset until you need it for the next investment... but that is just what I have done.

I agree.
Besides the LMI just gets tacked onto the loan, so it's not like it's coming out of your wallet.
 
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