100% loan for IP without crossing PPOR loan

Hi,
Newbie here, pardon me if what I said don't make sense.

We have a PPOR which we have paid down quite a bit and have some money in the offset .

Planning to buy an IP, is 100% loan possible without having my PPOR as a security (read a bit in this forum about the downside of cross collateral loan)?

We would also need to plan ahead in this financial arrangement as we might want to convert this PPOR into an IP.

Any suggestions? Much appreciated.

 

Hey Woof My pup is snoring next to me as I type this!

You certainly can do this - it does require your PPOR as security for a portion of the loan, but we can do it without cross securing it.

It's basically securing a small loan split - usually enough for a 20% deposit plus buying costs - to your home via an equity release, and then securing the remaining 80% to the new IP.

If you convert the PPOR to an IP in the future, this structure won't have any impact on that.

 

You would borrow 80% against the property being purchased, but would also need the other 20% or 25% to come from a loan which generally also must be secured by something.

You have 3 choices
a) secure against the main residence or another property you own, without crossing securities
b) a related party loan (parent, spouse etc), or
c) cash as a term deposit - impractical

you can simply do a) above by splitting the existing loan, repaying it and then redrawing and using for the investment.

 

That's not ideal if the PPOR is going to be an IP later though.

 

It's fairly straight forward. You simply create an equity loan for the deposit and purchase costs (roughly 25% in VIC would be ideal to cover this) against the existing home. You borrow the remaining 80% against the proposed IP.

You haven't borrowed 100% against the new IP, but all of the funds are for the purpose of purchasing the investment property and should thus be tax deductible. The properties are not cross collateralised.

There's a number of ways to create the equity loan, it really depends on your circumstances. You might do some debt recycling if you're ahead on the mortgage repayments, or you might set up a completely new equity loan.

 

How do I spot a cross collateral loan application?
2 property addresses on the same document?

 

It depends. If they cannot service they may have no choice, but if they can borrow further against the main residence this would be preferred.

 

If you are going directly with a bank, it is likely to be crossed.
You must advise them what the security of the loan should be.
When the loan documents come, just make sure there is only one property being used as security - and make sure it is the right one.

 

I assumed that banks want it to be crossed as it offer more security for them, as the financier

 

Yes they will want to cross it if they can as it is in their best interest to get as much security for a loan as they can plus to tie you up making it difficult to refinance, but as Rolf says you are the one in control and do have a choice.

 

Loan documents will list the security properties, so yes, there's be more than one property held as security.

Avoiding cross collateralisation usually requires one loan application per property, which translates to one set of loan documents per property.

 

Just for discussion
PPOR
Initial mortgage loan 600k
Offset 350k

IP
Budget 900k
20% deposit + stamp duty + legal, say $230k

Questions
1 instead of paying $230k cash for my IP loan, I should pay it into my PPOR mortgage loan
to create an equity loan?

2 if my current PPOR is to be converted into IP (while I convert another IP into PPOR), what portion of the current PPOR loan is tax deductible? Only 370k (600-230)?

3 can I create an offset for the equity loan?

Doing some planning here to avoid financial mistakes down the road

 

Not advice but general comments.

1. Can be a good idea - it will reduce owner occ debt while increasing investment debt. Although - there's implications if your current PPOR will become an IP.

2. The deductible portion will be whatever the current loan amount is against the PPOR

3. You should be able to depending on which lender you're with. If the equity release is for investment purposes - and if you still have a PPOR debt then best to link the offset to the PPOR debt

Cheers

Jamie

 

1 - Not if it's going to become an IP and you'll be buying a new PPOR down the track, or moving into an existing IP. Better to create a new loan so your tax deductions are kept high. Offset funds can then be set against the new PPOR loan.
2. Assuming the loan isn't messed up with redraws and so on, it should be the current loan amount.
3. Yes.

 

Answers
1. Depends. If your serviceability works and you have equity borrow against the main residence. If you don't then split then repay and reborrow for the investment

2. Impossible to say based on the limited infomation. Only the loan associated with the current property could be deductible - the interest portion that is. So have you ever redrawn or borrowed extra?

3. You can, but from your question I am not sure you understand this.

 

700k ish , I would think




Also never redraw or borrow extra... This loan is untouched since its grant

 

What's an effective equity?