Hi everyone, Looking to purchase an IP and i have 2 options 1) 80% LVR ( borrowing 700K) 2) 90% LVR ( borrowing 880K) Looking for capital growth locations with decent rental yields (ideally neutrally geared or best case scenario positively geared) For someone looking to build a portfolio what would be a better option? Are there any drawbacks for initially starting off with 80% LVR? Thank you
The only drawback of 80% LVR is you've got less funds available for the next deal. Some of the benefits of 80% LVR are:] * Better rates - most lenders charge higher rates above 80% (and some even better for 70% or even 60%). * Most lenders will offer interest only (IO loans above 80% are limited). * You don't pay LMI (money you'll never get back). * Any growth above your purchase price is equity you can use (many lenders restrict the equity you can access above 80%, think of 80% as the starting line for accessing equity, if you start above 80% you're starting from further back). * If you need to move lenders for some reason, you don't need to pay LMI again. Often the best way to approach this is to understand your resources. If your borrowing capacity is limited there may not be enough available for a second property even if you've got the deposit. In this case 90% might be a wasted effort. However if you've got a lot of borrowing capacity and your deposits are a finite resource, then 90% might allow you to acquire more property sooner.
When it comes to buying the next couple of properties are you limited by your deposit, or your borrowing capacity?
You could always borrow up to 90% when buying the next one. Strategy: Avoid LMI where your Servicing is Limited (and you have the cash) https://www.propertychat.com.au/community/threads/strategy-avoid-lmi-where-your-servicing-is-limited.18960/
Thank you for the detailed response. With my current situation, i am hitting my borrowing power maximum with 90% LVR. With 80% i might just have the little bit extra to borrow for the next one. I guess in my situation, it would make more sense to go with the 80%.
I would start with 90% if you have limited deposits and aiming to buy multiple properties asap. Once you have a few and equity builds up so deposits are easier to fund then switch to 80%. If deposits not a concern then 80% for sure in my opinion.
With 80% LVR scenario- I am using all the equity I have as a deposit (equity from home). I might still have some borrowing capacity left for a third property, however will be limited by deposit unless i quickly generate equity from my 1st or 2nd properties. With the 90% LVR scenario- I need not use all my equity so will have some deposit left for a third property. However i will be limited by my borrowing capacity( based on my current situation).
Beyond the immediate purchase, if you only have borrowing capacity for say $100k - $200k, what are you going to purchase with that borrowing capacity? By going 80% now, your borrowing capacity will actually be slightly better in the future because your rates will likely be cheaper (although this is unlikely to make an significant difference in the immediate future). Borrowing capacity is something that tends to improve over the medium to long term, but not the short term. People tend to get salary increases, but with rate increases happening, don't expect anything good to occur over the next year or two. This also gives people time to save the next deposit and the better cash flow of an 80% lend will assist this. The cash retention benefits of a 90% loan are only useful if you can do something with it in the short term. In the long term you're more likely to get that extra 10% back in equity growth anyway. A detailed understanding of your borrowing capacity is key here.
What lenders have you used to determine you won't have any borrowing capacity left? Lenders have different borrowing capacity calculators so just because you're maxing out with one lender doesn't necessarily mean you'll be maxed out with all lenders.
. Thank you @Peter_Tersteeg, @Sanka and @Lindsay_W I have just spoken to the broker i am using and here is my updated scenario. 80% LVR- purchase price (700k). 90% LVR - purchase price (up to 1M) using second or third tier lenders. I am thinking about the below 2 options: 1) Use 80% LVR and buy one property at around 650-700k. In this scenario i have used up all my deposit but have about 350k borrowing power left. ( stretching it). I could potentially buy another property for about 400k a couple of years later using equity from the 1st or 2nd properties. 2) Use 90% LVR to buy 2 properties (~600k and 350k). In this scenario I have no deposit left and have hit the ceiling in terms of borrowing power. ( at least for now). Which one would be a better option from a long term investment point of view?
I think you need to focus on the quality of the asset rather than the number of them. ie. 2 bad properties are worse than one good property.
Depends on the crowd. For some you say you own 20 properties (missed a decimal place and it should really be 2.0). For others you say you don't own any properties and your landlord is an a-hole.
Unless buying back to back or seeking to maximise portfolio size in quick succession, buying at 80 often makes more sense. There is far more manoeuvrability from a finance perspective to redeploy the equity used. Buy well, and at a good time, after a few months, can order multiple valuations from lenders and strip out some equity. With a bit of luck, you'll have the additional capital you've poured in back with you, and wont have paid any LMI. Buying above 80 does limit options in terms of having flexibility to move around lenders as much, given LMI paid and uncertainties releasing equity above 80. I'd bump it up a notch in thinking headspace and ask yourself how big of a portfolio size do you really want. Bigger may not necessarily be better (greater risk, etc).
