What do you pay, what do banks pay?

[SoyLatte]

Hi everyone,

I'm a first time investor and have been following the forum for the last few months. I've been inspired to 'get my hands dirty' and take the steps to buy my first property. I've setup a HDT and have received a pre-approval for a loan. Backwards as it may seem, I'm not quite sure what the deposit, settlement process looks like, assuming:

1. I'm buying a 500k property
2. I've received pre-approval for an LVR of 95% which means i can borrow 475k
3. If i bought a house through an auction, I will need to put in a 10% deposit immediately. I'm guessing this will be my own money, so I would have had to save up 50k?
4. On settlement, would the bank pay 450k? or 475k?
5. Can I use my loan to pay for the purchasing costs such as stamp duty?

So in the end, how much of my own money do I need to pay and how much can I get the bank to pay? Ideally, I would like to use as little of my own money as possible.

Realise this is probably quite simple but it's been confusing me for a while. Any help would be appreciated

 

[Bandita]

Hi everyone,

I'm a first time investor and have been following the forum for the last few months. I've been inspired to 'get my hands dirty' and take the steps to buy my first property. I've setup a HDT and have received a pre-approval for a loan. Backwards as it may seem, I'm not quite sure what the deposit, settlement process looks like, assuming:

1. I'm buying a 500k property
2. I've received pre-approval for an LVR of 95% which means i can borrow 475k
3. If i bought a house through an auction, I will need to put in a 10% deposit immediately. I'm guessing this will be my own money, so I would have had to save up 50k?
4. On settlement, would the bank pay 450k? or 475k?
5. Can I use my loan to pay for the purchasing costs such as stamp duty?

So in the end, how much of my own money do I need to pay and how much can I get the bank to pay? Ideally, I would like to use as little of my own money as possible.

Realise this is probably quite simple but it's been confusing me for a while. Any help would be appreciated

Hi SoyLatte,

Welcome!

It depends on your bank - but if it's for an IP, you will probably have to pay the "purchase costs" (i.e. stamp duty) on your own. You'll have a high LMI fee on a 95% 500k purchase (about $10k) - but the bank may capitalise that on the loan.

If you buy at auction - you'll put down 10% (or whatever deposit is) - and then when you settle, you will have to make up the difference between purchase price plus costs less deposit and loan amount. That difference will come out of your pocket if you have no equity in any other investments.

If you can't capitalise the LMI, it looks like even with a 95% loan you're up for about $64k that you will have to contibute yourself, $10k less if the LMI is capitalised.

Is there a reason you're looking at such a high starting price for the first IP? Do you have equities in any other properties?

Cheers,
Jen

 

[granev]

i am no expert , but the banks will want some security.
if you have enough of that , you probably wont have to put any money up at all
i would suggest to talk to your lender , you may be surprised.
the experts on here will be able to advise you further

i would also question why you would want to pay so much for a first IP

 

[SoyLatte]

Thanks for your answers so quickly!

500k was just a figure I used to make the example easier. I have no existing property security although I do have around 80k worth of shares. I'm currently living with my parents so I plan to rent out the bought property.

As for the range of a starting IP, around how much should I look for?

 

[Bandita]

Thanks for your answers so quickly!

500k was just a figure I used to make the example easier. I have no existing property security although I do have around 80k worth of shares. I'm currently living with my parents so I plan to rent out the bought property.

As for the range of a starting IP, around how much should I look for?

Hi SoyLatte,

Oh, depends on so many things! ...your income....how much you're willing to spend per week to hold the property.....the rental yield....the location....house or unit.....

It's easier to start small, and then use the equity in the properties (plus maybe some of your own funds) to buy the next one....after a few years, you'll have enough equity you won't need any funds at all to purchase another.

Unless it's for a PPOR, $64k is alot to fork out for your first IP - seeing rental yields in properties priced around the $500k mark are pretty crap, so it will cost alot of your own funds to hold the property. Remember you won't see that money again for along time! And once you move out of home, your living expenses will increase DRAMATICALLY!! You just can't judge the amount (until having to pay it yourself) water, rent, gas, electricity, food take out of that income each week!

I would look more around the $300k mark, but that's me Or if you're really keen to get in, you could look for 2 x IP's at $250k each - it's actually cheaper (due to lower stampy duty and LMI) to buy 2 x $250k IP's than 1 x $500k! Plus the holding costs are less......

Cheers,
Jen

 

[Peter_Tersteeg]

Hi everyone,
1. I'm buying a 500k property
2. I've received pre-approval for an LVR of 95% which means i can borrow 475k
3. If i bought a house through an auction, I will need to put in a 10% deposit immediately. I'm guessing this will be my own money, so I would have had to save up 50k?
4. On settlement, would the bank pay 450k? or 475k?
5. Can I use my loan to pay for the purchasing costs such as stamp duty?

You will need to put down a deposit on the day of auction, but the actual amount tends to be negotiable. Speak with the agents prior to the auction and state that whilst you've got finance approval, you can only hand over 5% (or whatever is suitable). Alternately the person who set up your pre-approval should be able to organise a deposit bond (but again, check with the agent that this is suitable).

On settlement, the bank would supply you with the application amount, so in your example it would be $475k. Excess funds above the purchase price will usually go towards stamp duty and other purchase costs unless you specify otherwise.

The person who sets up your pre-approval should be able to explain all this to you.

 

[SoyLatte]

Thanks for all your help! It's certainly cleared a few things for me in my head. Now I need to start researching lower priced, further out properties as I was hoping initially for an inner city (10km) radius from melbourne.