10% or 20% deposit for IP number 2

hi guys,

I've refinanced IP#1 (bank val 800k) and now have a split loan with 410k for mortgage and 120k available in 2nd split to use towards a deposit of next IP (each split linked to an offset).

Just wanted to gauge the collective expertise here on the forum as to what would you do in my situation:

1. Should I use a 10 or 20 % deposit for next IP?
2. Are lenders even allowing 90% LVR for residential investor loans?

I'm keen to use leverage as much as possible and started off with a 91% loan on IP#1 four years ago (446k purchase price) so not against paying LMI if numbers stack up in the end.

Thoughts?

 

I think the sweet spot is around the 12% percent deposit mark where the LMI cost are not too high. I am sure one of the brokers on here would be able to elaborate. You also need to look into you risk appetite as well.

 

I always vote 10 (but go 20 on deals that require it). Higher LVR is less risk as you get to keep more of your money in the bank to cover unforseen happenings

 

Agree with post above that sweet spot is 88% LVR which allows you to capitalise LMI costs with most lenders also

 

Generally I'm all for using leverage where possible, especially if it means you can achieve your goals more quickly. As DT said, it also allows you to keep more cash as a buffer which is important.

The only time I would suggest 20% is if the extra funds are going to burn a hole in your pocket and end up funding holidays/shoes/new x-box games.

 

I voted thinking this was negotiating with the vendor.... Still earlish for me. Duh..

If we a talking about LVR at the bank, I like neutral gearing, whatever the LVR. Rarly over 80%. That way I set and forget. It's right for me. Starting out though there are some advantages in higher LVR, if obtainable, most certainly. LMI seems such a waste, but with the right investment it can pay back ten fold.

 

If you're wanting to be aggressive with the investing - then use a smaller deposit now.....if you chip in 20% now you might find it difficult getting that equity out later.

Cheers

Jamie

 

Terry W posted a good breakdown about the pros and cons of this some months ago..

Basically; not a lot of benefit to put in the extra 10% cash from memory.

Personally; my view is that it is always to have less debt and more LVR... just in case.

 

You know this doesn't work right? LVR and gearing are completely unrelated.

 

So far every response has been in favour o fa higher LVR (90%) because it preserves your cash and will position you for the next purchase sooner. This is quite valid but only looks at one aspect.

Also consider that you'll pay higher rates with most lenders for a 90% LVR and when it comes to accessing equity in the future, you may only be able to do this at 80% LVR (so you'd have to wait quite some time before using the new property as a source of equity). The cost of LMI is also significant and there's no actual value to yourself in it.

* Is it your intention to purchase another IP in the near future?
* Do you have the borrowing capacity to actually purchase another IP?

If the answer to either of these questions is no, then most of the reasons for a 90% LVR are invalid and it's a waste of money.

If you answer yes to both questions, then I'd take the 90% LVR.

 

If your keen on leveraging, have the desire and ability to borrow more in the future, then preservation of cash is probably a good idea. If your at a point where you have the cash available and are no longer looking to borrow anymore, a 20% deposit may be suitable.

In most cases i would recommend a 12% deposit approach, however, it generally follows a discussion around a few important questions:
1. Do you have the desire to purchase more (plenty are at the end of purchasing)?
2. Do you have the ability to purchase more (serviceability)?

and most importantly:

3. What will your risk/leverage position look like if you tipped in 20%? Tradeoff the potential higher rate/LMI cost into your cashflow estimates. As others have mentioned, having some more cash in hand can be a very good risk management ploy. Ironic because you are borrowing more/higher LVR, but in the right circumstances having the flexibility of cash on hand can buy you time if/when needed.

Cheers,
Redom

 

Can you please elaborate?

 

If you've structured your equity release properly, regardless of if the next purchase is 80% or 90%, you're still ultimately borrowing the full purchase price and stamp duty - you're simply using multiple properties and loans to acheive it.

The amount you've borrowed isn't different for either option, just the structures of the loans being used. As a result, your gearing position is ultimately the same for both scenarios.

 

Ah, ok. I see where you guys are coming from. Cheers