Accessing equity? From a novice!

Hi all,
I've just joined the property chat community and was hoping to get some basic advice on how to best utilise the equity in my investment property and start building a portfolio. Any thoughts/advice would be appreciated!
I bought an investment property a number of years ago for $450k in Manly, Sydney, like most properties in Sydney it has done very well and is now worth approximately $850k. I have 200k debt on this.
I have approached CBA to refinance my loan across from another bank and then got pre-approval to purchase another investment property up to $500k using my Sydney property as security.
As far as accessing equity, could I arrange a valuation and then access say 200k from my property and put this into an offset account to service my 2nd investment property? Would this be advisable and what implications would it have for my first loan?
I'm thinking it's a good idea to do a valuation now as in my opinion Sydney is at the top of its cycle.

 

Hi and welcome aboard

Best approach is to usually set up a second loan against the Manly property. If you set it up as variable, interest only - you can have the funds dropped into the loan for you to redraw when needed (that way you don't pay any interest on the funds until you spend the money). Or you could set up an offset that's linked to the equity release and drop the funds in there - CBA allow for multiple offsets so that could work fine too (just don't move any other funds in/out of the new offset).

Access enough to cover off a 20% deposit and costs on your next purchase (so around $125kish for a $500k IP). If you think you'll purchase a third property (and if servicing allows) then consider accessing more equity now.

Cheers

Jamie

 

The answer might be obvious to a lot of you experienced investors!
Cheers
Mike

 

Nah - we're a friendly bunch and we all started from scratch. At least you're here asking questions

Cheers

Jamie

 

If your property is worth $850k, then you could potentially borrow up to $680k against it (80% of its value). As you currently owe $200k against it, that's $480k in equity you may be able to access.

You should access this as an equity loan against your first property. Whatever you do, don't let the bank use your existing property as security for any new purchases. By accessing the equity as a separate loan, you'll release the equity as cash and there's no need to cross collateralise.

 

Mikeproperty,

Firstly I have some questions for you ..

Any particular reason why you have decided to move to CBA? Might be worth talking to a broker about what is your best option. I'm not anti CBA (I'm in fact in the process of refinancing a property across to CBA) but you should make sure you are choosing the appropriate bank for your situation.

When you say you have $200k debt, have you paid down an original loan balance to get down to that? ie. no existing offset account. Have you made any redraws on this loan?

Do you have a PPOR (principal place of residence) that you didn't mention?

Regards,

Jason

 

Hi Jamie and thanks for the prompt response! So to clarify, if I accessed 125k equity for a second loan would that mean my 200k debt would increase to 325?

 

You could do that but there would be many tax issues to consider - you are basically borrowing to pay interest if you did that and the interest on interest may not be deductible.

 

Yep spot on. But it would be over two loans. Loan 1 would be $200k (your existing loan) and loan 2 would be $125k (deposit/costs for your next IP)

Cheers

Jamie

 

Not really. It would mean you have 2 debts - one for $200k and one for $125k. They may or may not be separate loans, but from a tax perspective they are.

if you do borrow extra, and it is a good way to proceed, make sure you have 2 loans. The new split will be deductible against what it is used for, not deductible against the income from that property (unless you do extensions etc).

 

Hi Peter - thanks for providing clarity on borrowing capacity. Yes, CBA said that the Manly property would be used as security so it seems like I haven't been provided the best advice by my home lender... good to know! With the scrutiny on investor loans will there be any issues getting a seperate loan without providing security?

 

It's so much clearer now - thanks mate!

 

Pleasure mate

Cheers

Jamie

 

Hi Jason,
Basically because I have done my personal and business banking through them so more out of convenience than anything else. Perhaps your right, the advice I've received from the brokers on this forum has been clearer than the lending manager that I'm dealing with .. so would probably benefit from talking to a real expert
Yes I put down a decent deposit and have been paying it off over the years through principal and throwing in the lump sums when I can. So 200k is the loan balance..
I'm currently renting.

 

When accessing equity to fund the purchase of another IP, and the release of the equity is approved and an account has been setup.

Is there a set timeframe i need to use the equity (for the next IP purchases)?
Can i say for example use it in 3yrs time to purchase my next IP?

Tx
K.

 

The new purchase will be security for the new loan - in the end it will look like this
Loan 1 secured by Manly =$200k
Loan 2 secured by Manly = $equity for deposit
Loan 3 secured by new property = 80% of purchase price (or 88%depending on plans)

 

You can keep it unused as long as you like in most cases.

 

Hi Jess, say in this instance all the loans are with CBA.

Loan 2 = $80k (equity from Manly IP), can this be setup to offset against Loan 1???
Which i understand leads to deductible interest based on $120k.

Apologies OP for the hijack.
Thanks, k.