100% LVR vs 80%LVR

Hi,

I am looking to buy an IP. At the moment, I have two options:

1. $340K budget for 105% LVR (using equality for deposit)

2. $400K budget for 80% LVR (using equality for deposit and cash for the shortfall)

Option 1 can give me better tax deductions but option 2 can let me buy closer to CBD. Which option should I choose?

Thanks,
Kai

 

Go for growth!

 

Hi Kai

Will have you much savings left over for a buffer if you go with option 2?

If you do go with option 2 - could you pay that cash into the principal of a PPOR debt and reborrow?

 

It depends- will you need that cash to put toward a ppor at some stage?

 

If the other property in which you have some equity has other non-deductible debt against it, you would recycle your cash and make a portion of that non-deductible debt into tax deductible debt.

This would then allow you to fund either purchase purely using equity, effectively borrowing 105% in either case.

Incidentally by suggesting that you're going to fund at an LVR of 105% suggests that you're going cross collateralise the two properties. This is generally acknowledged as a bad way to structure your loans. I'd suggest you read the following post:

https://propertychat.com.au/community/threads/cross-collateralisation-10-reasons-to-avoid.153/

 

Option 2 will use about 10% of my savings so I will still have enough buffer. I don't have a PPOR at the moment. Only got one IP and looking to buy the 2nd IP.

 

My broker told me:

If I cross collateralise them, I can get a rate of 4.4%. Otherwise the rate could be 4.7% (Still at 105% LVR). Is that about right?

 

It's possible that by cross collateralising you might be able to get a better rate, but I wouldn't take that as a given, in fact it's unlikely that it will result in a better rate. I'd only believe this when I saw it in writing from the lender.

Despite the loan being secured by a PPOR, most lenders are still seeing it as an investment loan and charging investment rates.

Crossing collateralising can derail a good investment strategy. I'm working on one deal at the moment where the cross collateralising is preventing the client from moving onto the next property. By crossing his loans, he was charged at least $4k in extra LMI and it will take another $7k in LMI to get him out of it. It's also taken weeks to untie.

But in this case the saving of 0.3% on $600k over 3 years would have been worth about $5,400.

 

It probably is right, but it's not necessarily good because the property is cross collaterised.

 

You don't need to cross to get the rate. Which lender is this?