Using Equity in PPOR

[JohnA]

Hi
I understand that I can use the equity in my PPOR to enable me to buy IPs. But I do not understand the how - in terms of loans and structuring.

For discussion just say I have 400k in equity to use for IPs.
I want to buy 5 x 300k properties (just a simplified example)
I would use 80k each time from equity in PPOR for each (deposit, purchase costs).

1. What type of loan do I get for the 80k? Is this a LOC loan so a higher interest rate?

Then do I get a separate IO loan for the remaining 80%. SO IP#1 has two loans.

Do I repeat the same process for IPs 2-5?


How is it done please?

 

[Brady]

Me personally I don't mind cross collaterlisation, would take out new loans borrowing 100% + costs then continuing.

Others prefer to set up LOC for the deposit / 20% and costs and have individual loans for the remaining 80% and keep the securities separate

 

[Aaron_C]

JohnA,

A broker will be able to tell you exactly how it works over the phone/on paper which tends to make it easier to understand. But I will attempt to do so in this medium:

Let's say you own a $400,000 property with no debt, and it is your PPOR. So equity is $400,000.

You go to the bank and get a 'line of credit' against the house of about $320,000. Most lenders charge a premium for line of credit products (in terms of rates) but some charge the same.

You then use some of the line of credit to put down as a deposit for the next IP you buy. Say this deposit is $80,000. So I would advise you split the LOC into a 80k and 240k split. Then you borrow the remaining amount on the IP you are purchasing, separate to the original loan. So the IP (of $300,000) will have two loans basically - one with $80,000 secured against the PPOR and one of $220,000 secured against the new property.

After your first IP is bought, you still have $240,000 in the LOC that remains untouched, and you can repeat the process for the next purchases.

Hope this helps.

 

[Rolf Latham]

Me personally I don't mind cross collaterlisation, would take out new loans borrowing 100% + costs then continuing.

The specific benefits of Cross vs standalone in your personal opinion then please


I acknowledge there are times when xcoll can be of specific benefit, but would like your views



ta
rolf

 

[Qlds007]

I was going to ask the same question.

I can only think of a couple of circumstances when i could see X collateralising your loans is a good thing other than the only benefit i can see is for your Banker.

 

[JohnA]

Thank you Aaron - I am trying to educate myself first before approaching a broker. Different brokers / lenders - different approaches.

When you split the LOC then you have an 80k component attached to the IP and then a 240k component sitting there for the next purchase? - then you split again.
Are there any potential issues with this method? What happens when all equity is used but PPOR has increased in value - do you then take out another LOC to access the new equity to fund new purchases?

If you have security for the 20% and properties are Cf +ve can you assume that you will always get approval for the other 80%?

Do you get pre- approval for a certain amount (eg 900k) - which means you could buy 1,2 or 5 houses OR do you have to get pre-approval for each potential property?

In regards to Brady's response where you borrow 100% (or 105% to cover costs) and use PPOR as security - what are the pros and cons? I have read that if you default then the lender can choose to sell your PPOR first. If you don't intend on moving from your PPOR in the next 10 -15 years and ensure you have a buffer - then is this just as good an option?

 

[Rolf Latham]

In regards to Brady's response where you borrow 100% (or 105% to cover costs) and use PPOR as security - what are the pros and cons? I have read that if you default then the lender can choose to sell your PPOR first. If you don't intend on moving from your PPOR in the next 10 -15 years and ensure you have a buffer - then is this just as good an option?

Hi JA

Below are some of my concerns with the xcoll subject, from a looooooong time ago, and they still apply today, and in some cases more so

ta

rolf




Im no finance guru, but will strongly suggest (and at the risk of repeating myself myself that whenever a banker suggest that something isnt a problem in regard of equity contribution, that one takes this with a grain of salt, just as one would taking advice from the ATO on minimising your taxes.

Just seven reasons faced by my clients with cross coll have been :

1. Bank holds all your equity. Says no more money, youre at your maximum service level. Release of property may take many weeks to months or at an extreme the lender forces you to take ALL the loans to another lender.

2. Bank holds all your equity and you have fixed loans. Bank Says no more money, youre at your maximum service level. Release of property may cost squillions because you need to break one or more fixed rate loans.

3. Bank holds all your equity. Says no more money, youre at your maximum service level. Loans once were all at 90 % of lvr, now at 75 %. You want to revalue to 90 % and only pay lmi on the new money. Sorry borrower, please go to another lender and pay new mortgage insurance

4. Bank holds all your equity. LMI says no more money, youre at your maximum exposure level. Sorry borrower, please go to another lender and pay new mortgage insurance

5. Bank holds all your equity. Bank says your estimate of valuations are rubbish, we arent going to give you any more money. Sorry borrower, outcomes as per 1 to 4 above.

6. Bank holds all your equity. Mr and Mrs decide to split assets after divorce. 1.3 mill fixed rate loan crossed over several properties. 63 000 break cost to split it all up and sell some off

7. Bank holds all your equity. You run into financial difficulty, BUT you have lots of equity. You try and move one of your properties to a fast settling no doc lender to release funds and get you of trouble. Bank wont release security, they smell a rat, slow the release of the property, and within 60 days you will have a judgement against you and the sheriff at the door.

Now, lets weigh this against the benefits of xcoll .

1. Maybe reduced fees, UNLESS you do a fair few revals in which case your entire portfolio needs to be revalued every time.

2. Xcoll allows you to pool little bits of equity. Most loans will allow top ups of as little as 10 k

3. Sometimes its the only way the lender will do the deal, and in that case xcoll is better than no loan.


Dunno bout you, but in MOST cases xcoll doesnt present a good argument.

ta

rolf

 

[JohnA]

Thanks Rolf - you have made a good case not to Xcoll.

 

[Aaron_C]

John, answers to your questions below:

When you split the LOC then you have an 80k component attached to the IP and then a 240k component sitting there for the next purchase? - then you split again.

Are there any potential issues with this method?

No as long as you keep the splits done properly and make sure that the LOC is only used for investment purposes and you keep track of where the proceeds go.

What happens when all equity is used but PPOR has increased in value - do you then take out another LOC to access the new equity to fund new purchases?

Yes you could do that, very easily.

If you have security for the 20% and properties are Cf +ve can you assume that you will always get approval for the other 80%?

Depending on serviceability, but getting loans for 80% lends are generally very easy once your servicing is OK.

Do you get pre- approval for a certain amount (eg 900k) - which means you could buy 1,2 or 5 houses OR do you have to get pre-approval for each potential property?

Honestly, forget this 'pre-approval' nonsense. For most purchasers it doesn't mean anything as many banks issue their 'pre-approvals' without assessing the deal through credit first. In banking, Credit rules. End of Story. Sales is just to get you through the door. What I will say, however, is that you should ask your broker/banker for an estimate of how much you can borrow, based on your income/rentals etc, for each purchase you make, not as a whole as the numbers change with each deal since each property has different sale values and different rental amounts which impact on serviceability.

In regards to Brady's response where you borrow 100% (or 105% to cover costs) and use PPOR as security - what are the pros and cons? I have read that if you default then the lender can choose to sell your PPOR first. If you don't intend on moving from your PPOR in the next 10 -15 years and ensure you have a buffer - then is this just as good an option?

Mostly Cons, as Rolf has indicated quite succinctly.

 

[JohnA]

John, answers to your questions below:


Honestly, forget this 'pre-approval' nonsense. For most purchasers it doesn't mean anything as many banks issue their 'pre-approvals' without assessing the deal through credit first. In banking, Credit rules. End of Story. Sales is just to get you through the door. What I will say, however, is that you should ask your broker/banker for an estimate of how much you can borrow, based on your income/rentals etc, for each purchase you make, not as a whole as the numbers change with each deal since each property has different sale values and different rental amounts which impact on serviceability.

[/b]

Thank you Aaron.

So if I ask a broker/ banker how much I can borrow and they say 500k then is it safe to say that I can go and make offers on an IP ( with a subject to finance clause). Do lenders look at servicability when giving you this estimate or only after you present them with a specific property?

Also when you ask your bank how much you can borrow - does this inquiry go on your credit file.

 

[Aaron_C]

So if I ask a broker/ banker how much I can borrow and they say 500k then is it safe to say that I can go and make offers on an IP ( with a subject to finance clause). Do lenders look at servicability when giving you this estimate or only after you present them with a specific property?

Also when you ask your bank how much you can borrow - does this inquiry go on your credit file.

Lenders look at your serviceability based on the property that you are buying. But they can give you a pretty good estimate based on what you tell them.

As for whether the enquiry goes into you credit file - it will definitely not go to your credit file if you talk to a broker. If you talk to the bank, then if you sign the privacy form (which they will ask you to do, I guarantee it), then yes, it will go onto your credit file.

 

[Rolf Latham]

Thank you Aaron.

So if I ask a broker/ banker how much I can borrow and they say 500k then is it safe to say that I can go and make offers on an IP ( with a subject to finance clause). Do lenders look at servicability when giving you this estimate or only after you present them with a specific property?

Also when you ask your bank how much you can borrow - does this inquiry go on your credit file.

Hi John

Im sure Aaron is prob a 30 second phone call away from you..............

Find a decent broker and spend some time chewing the fat. You can never cover all the possible ground on a forum.

While there is great community benefit in running questions such as this, in the end, you cant act in reliance of such general info. with getting specific advice relevant to your circumstances

ta
rolf

 

[JohnA]

Hi John

Im sure Aaron is prob a 30 second phone call away from you..............

Find a decent broker and spend some time chewing the fat. You can never cover all the possible ground on a forum.

While there is great community benefit in running questions such as this, in the end, you cant act in reliance of such general info. with getting specific advice relevant to your circumstances

ta
rolf

Rolf

I am not sure what you are trying to say here... many interpretations...

 

[Rolf Latham]

Rolf

I am not sure what you are trying to say here... many interpretations...

I will remove variations, sorry for being non specific



pick up a phone

speak to Aaron

get specific advice on your scenario

Ta

rolf