Using Equity in my PPOR to borrow

[ando]

Hey Everyone

Can a financial guru explain to me what the dangers could be in using the equity in my PPOR (about $100K) to borrow for an IP. My wife is on the conservative side and is very cautious of putting our house up as security to borrow against.

If worst comes to worst and the IP fails is there any danger for our PPOR?
also
What happens to this equity if we use this to borrow? Is it then gone never to be used again? If our PPOR continues to rise in value does equity again continue to accumulate?

Cheers

 

[Rolf Latham]

Hiya Ando

Correctly structured u can minimise the risk, but you can never isolate it completely.

The first thing would be to only grab a deposit and costs from your PPOR via a separate loan secured only to the PPOR

Next get a separate loan secured only to the new IP. If you are very concerned about asset protection, then this should be from a different lender than the one you use for the PPOR loan. This will only buy you time if you fall over properly, since the PPOR lender will come sue you for any loss anyways.

Thirdly, buy well

4. Make sure you have a decent cash buffer under you, that could be cash or unused borrowings

5. Carry adequate property, and life insurance etc

6. Look at managing your rate risk


The biggest risk in life is often doing nothing............

Having said that, is it possible that its not the right time for your family to get into IPs. Is there an intuition or guidance that your wife is tapping into......dont discard gut feel entirely as a part of your decision making process.


ta
rolf

 

[marg4000]

If you default on a loan the lender can come after any asset you own, including your PPOR (depending of course on how your assets are owned).

By mortgaging it they simply make the process quicker and easier, and have first claim on it.

Make no mistake, they WILL get their money, even if they bankrupt you in the process.
Marg

 

[ando]

Hiya Ando

Correctly structured u can minimise the risk, but you can never isolate it completely.

The first thing would be to only grab a deposit and costs from your PPOR via a separate loan secured only to the PPOR

Next get a separate loan secured only to the new IP. If you are very concerned about asset protection, then this should be from a different lender than the one you use for the PPOR loan. This will only buy you time if you fall over properly, since the PPOR lender will come sue you for any loss anyways.

Thirdly, buy well

4. Make sure you have a decent cash buffer under you, that could be cash or unused borrowings

5. Carry adequate property, and life insurance etc

6. Look at managing your rate risk


The biggest risk in life is often doing nothing............

Having said that, is it possible that its not the right time for your family to get into IPs. Is there an intuition or guidance that your wife is tapping into......dont discard gut feel entirely as a part of your decision making process.


ta
rolf

Thanks for the advise again Rolf,

I was looking at only getting deposit and costs from my PPOR via a separate loan.

Is it then possible to get a loan secured only to the IP ?

 

[Perp]

I was looking at only getting deposit and costs from my PPOR via a separate loan.

Is it then possible to get a loan secured only to the IP ?

Yes, and that's the best way to do it.

 

[ando]

Yes, and that's the best way to do it.

Should I then have an offset account attached to the IP Loan and pay all the outgoings etc from there?

 

[Rob Williams]

Should I then have an offset account attached to the IP Loan and pay all the outgoings etc from there?

Most investors I know would link the offset account to the PPOR loan so as to reduce the % of their total interest bill that's attributable to the PPOR, where there is no tax benefit, thereby maximising the % of the total interest paid each month that's deductable.

 

[ando]

Most investors I know would link the offset account to the PPOR loan so as to reduce the % of their total interest bill that's attributable to the PPOR, where there is no tax benefit, thereby maximising the % of the total interest paid each month that's deductable.

Rob, I have a Line of Credit for my PPOR so there is no offset account for that.

I would like to hear your thought's on how to best set this up though.

Cheers

 

[Rolf Latham]

Hiya Ando

As previously suggested, I would usually get the LOC changed to an IO term loan with Offset.

I would then use a separate loan to draw the deposit and costs against the hone equity.

Then a separate loan for the IP 80 %, only secured to the IP.

Depending on if you want to do debt recycling or interest capitalisation there may be some variations on that, but thats a basic footprint

ta
rolf

 

[ando]

Thanks Rob and Rolf, I now have a much better understanding of the whole process.

Greatly Appreciated.

 

[jingo]

Hey Everyone

Can a financial guru explain to me what the dangers could be in using the equity in my PPOR (about $100K) to borrow for an IP. My wife is on the conservative side and is very cautious of putting our house up as security to borrow against.

Hi Ando,

I am no financial guru, but have a loan or two which have been used to fund IP purchases.

I can understand your wife's concerns. As long as you can comfortably service the new mortgage and the associated costs of holding an IP, then the risk of loosing everything is greatly reduced.

Used correctly, your PPOR can prove to be a fantastic base for further wealth creation.

also
What happens to this equity if we use this to borrow? Is it then gone never to be used again? .

The equity has been used to help finance your new IP. Some of the equity will be used for purchase costs (stamping, conveyancing costs etc), and the rest for the deposit. You can retrieve this equity by waiting for further growth to occur in the new IP and drawing it up to purchase further assets, or by selling the IP once it has achieved an appropriate level of capital growth.

If our PPOR continues to rise in value does equity again continue to accumulate?

Cheers

Yes, and if you have an IP it accumulates faster!

Regards Jason.