Why the need to re-mortgage our PPOR to get a loan for an IP?

[Bambette]

We are purchasing an investment house. We own our home (PPOR) outright.
I don't see why the bank needs to put a mortgage on our home (PPOR) as well as the investment property.
It's a $265,000 loan for the IP. Our PPOR is valued at $210,000.
We have the ability to make the repayments on the loan amount on the IP (even without a tenant), and are covered to pay out all debts if something bad happens.
So why do they need to do that? Why put a mortgage over our home. The investment home to sell will more than cover the loan payout.
I don't like it. It feels like a risk to my comfy little world.
If its normal procedure then I still don't have to like it.
I only found this out when my Husband said that I had paper work from the bank to read and sign so I can be guarantor for the IP. It was never mentioned in previous conversations with the lender.
We have both names on our PPOR, but only his name on the IP as he is the sole income earner.

Thanks for your comments. I really do need to wrap my head around all of this. Hubby is fine with it all.

 

[baby blue eyes]

If you don't have a large enough cash deposit then the bank needs your equity.. Looks like they are trying to cross your loans, and I would avoid that situation. Re mortgage your existing loan with another lender and you use the new loan in your home as the deposit and costs on the IP.

Also sounds like the property is neg geared if it is only in his name and he is the only wage earner. You need to understand what you are doing before you sign docs.

 

[Bambette]

But we don't have a mortgage. Yet.
We own our PPOR outright. We don't have any loans. Yet (because I have not signed anything myself but I have to make a decision in the next few days).
We paid $10,000 as deposit as that was sufficient for the vendor and still have $26,000 in our other account. So we actually did have enough for the deposit.
The bank will have the mortgage on the IP.
Why would they need a mortgage on our PPOR as well?
It's like we are borrowing $265 to purchase the IP and yet the bank wants both houses as security. Is that really necessary?
Why would the bank need close to $500,000 equity (value of PPOR & IP) on a $265,000 loan?

Yes, we are going to be negative gearing the IP.

 

[PHP]

Hi Bambette,

Best to speak to a mortgage broker about your situation. By the looks of it, and just what baby blue eyes mentioned. They are trying to cross collateralize your PPOR.

To summarize things: (please correct me if im wrong)

PPOR: $210,000
Cash: $10,000 (Deposit paid) + $26,000 (set aside for IP) = 13.58% of purchase price

IP: $265,000
Borrower: (Under husband's name)
LVR: 86.42%
LMI: (insert LMI amount here)



These are the data that the other people on this forum will be working at base on your first post.

Again, speak to a broker asap. There's a lot of good brokers on this forum.

Cheers!

 

[ZachAnSel]

But we don't have a mortgage. Yet.
We own our PPOR outright. We don't have any loans. Yet (because I have not signed anything myself but I have to make a decision in the next few days).
We paid $10,000 as deposit as that was sufficient for the vendor and still have $26,000 in our other account. So we actually did have enough for the deposit.
The bank will have the mortgage on the IP.
Why would they need a mortgage on our PPOR as well?
It's like we are borrowing $265 to purchase the IP and yet the bank wants both houses as security. Is that really necessary?
Why would the bank need close to $500,000 equity (value of PPOR & IP) on a $265,000 loan?

Yes, we are going to be negative gearing the IP.

Banks only know their own product, means their way is the only solutions that provided

If you have sufficent funds, then the answer you dont need re-finance your mortgage.

Usually refinance only needed if you dont have sufficent fund. But I can see your bank try to cross coll, tie 2 properties with 1 mortgage.

The best way(imho) is to keep refinance PPOR. Why??? so you dont use your own fund to purchase IP and tax deductable purposes.
But you need to make sure the right structure in place.

Since you dont have non-deductable loan. You can setup offset link to IP loan and dump personal fund in there, to reduce your interest payment.

 

[Marty McDonald]

It's a mortgage on both properties (cross coll or stand alone structures) or leave Ppr unencumbered and pay lmi due to less than 20% deposit on IP.

 

[speary]

What's the value of the IP?

 

[macca446]

Hi,
Either pay 20% deposit or less than that then LMI required,the bank just wants to cover their own asses by taking your PPOR as cross collateral which you should not do I think a good broker can help you sort this out and plenty on the forum here .
Macca446

 

[Mick C]

But we don't have a mortgage. Yet.
We own our PPOR outright. We don't have any loans. Yet (because I have not signed anything myself but I have to make a decision in the next few days).
We paid $10,000 as deposit as that was sufficient for the vendor and still have $26,000 in our other account. So we actually did have enough for the deposit.
The bank will have the mortgage on the IP.
Why would they need a mortgage on our PPOR as well?
It's like we are borrowing $265 to purchase the IP and yet the bank wants both houses as security. Is that really necessary?
Why would the bank need close to $500,000 equity (value of PPOR & IP) on a $265,000 loan?

Yes, we are going to be negative gearing the IP.

1. The bank is trying to cross securitize your properties - i would avoid crossing if possible!

2. You have enough deposit to carry out a stand alone loan of 90% with a small lMI fee payable

3. if you want to avoid LMI, you will need to have 20% cash/equity- If you decide to go down the equity path i would take out the 10% of the purchase price as a SPLIT loan and avoiding crossing your PPOR into your IP.

 

[Mick C]

if you have 15% deposit in cash than you can also avoid LMI on a 85% NO LMI loan ( 90% for certain industry- doctors etc...)

 

[Terry_w]

We are purchasing an investment house. We own our home (PPOR) outright.
I don't see why the bank needs to put a mortgage on our home (PPOR) as well as the investment property.
It's a $265,000 loan for the IP. Our PPOR is valued at $210,000.
We have the ability to make the repayments on the loan amount on the IP (even without a tenant), and are covered to pay out all debts if something bad happens.
So why do they need to do that? Why put a mortgage over our home. The investment home to sell will more than cover the loan payout.
I don't like it. It feels like a risk to my comfy little world.
If its normal procedure then I still don't have to like it.
I only found this out when my Husband said that I had paper work from the bank to read and sign so I can be guarantor for the IP. It was never mentioned in previous conversations with the lender.
We have both names on our PPOR, but only his name on the IP as he is the sole income earner.

Thanks for your comments. I really do need to wrap my head around all of this. Hubby is fine with it all.

The bank will be acting in its own interest - not yours. They will take as much security as you allow them.

With a deposit there is no reason to use your main residenc as security.

However, unless your deposit is 20% this may result in LMI being payable. A solution around this would be to mortgage your property with bank B, take the deposit out of this and then go to Bank B for the investment loan, borrowing 80%. This will avoid LMI without giving the same bank both properties. You could then pay out the loan with Bank A quickly if you wishes and get the title back.

 

[Rolf Latham]

I only found this out when my Husband said that I had paper work from the bank to read and sign so I can be guarantor for the IP. It was never mentioned in previous conversations with the lender.

ouch.

i can see that would be a challenge.

Usually the lender is obligated to let you know that a mortgage or a security guarantee covered by a mortgage would be required

ta
rolf

 

[Peter_Tersteeg]

Based on the proposed loan amount of $265,000 I'd make an educated guess and suggest that the purchase price is about $250,000 - $255,000.

It probably isn't absolutely necessary mortgage the existing home given the cash deposit available, this purchase could be made using mortgage insurance but it's probably going to be a loan above 90% of the property value. It will almost certainly be more cost effective to use the equity in the exiting home in a property structured manner.

I agree with the general consensus, based on what's been said, the bank is almost certainly trying to cross collateralize the two properties which essentially ties the fate of both properties together. What happens to one effects the other which is not a good position to be in, only favors the bank and is easily avoided.

The other problem is that the bank isn't doing anything to educate the borrower, they're simply presenting a solution without outlining any options nor a justification for their solution. Property investing is essentially people taking control of their financial well being and if you simply take on face value what the various parties (banks, agents, etc) tell you, you're giving up a lot of that control.

Bambette you definitely need to get a second opinion on this. Make sure that you understand what's being done and why.

 

[Bambette]

Thank you so much for your advice. You all have really helped me. I look forward to staying a part of this forum for a long time. (I lurk a lot :blush: )
The bank is using only part of our PPOR as a security guarantee. $68,000 of guarantee. It is because we did not have 20% deposit. We are borrowing the whole amount. Which upon further reading was almost $280,000.
And yes, as soon as the loan is paid down enough,we will be releasing our PPOR from the mortgage.
After further discussion with our loans officer and further clarification, I do feel better about this now.
I am sure also that because this is our first venture that I am hesitant about a lot of things.

 

[Peter_Tersteeg]

Forgive me Bambette, but what you've just said only re-enforces my suspicion that the bank is cross collateralising the two properties. A couple of things to note:

1. Paying off the loan may not be the best strategy in the long run. If the loans are not cross collateralised, there may be far better ways of doing things which could set you up for IP number 2.

2. Even if you do pay down the loan as you've indicated, if the value of the IP decreases, you won't be able to release your PPOR.

A limited guarantee might only be for $68,000, but they're using the entire value of your $210,000 to secure it.

What should be happening here is that you're taking a $68,000 equity loan against your PPOR to cover the 20% deposit and purchase costs (stamp duty, etc). You're then getting a stand alone loan against the IP for 80% of the purchase price. The two loans (and two properties) are in no way linked in the banks paperwork. They'll actually be completely separate loan applications and separate sets of documents to sign.