Advice - Purchasing first PPOR to eventually be IP

Hey all,

I have recently spoken to a mortgage broker about making decisions with respect to purchasing a PPOR. It will be my first property.

The intention of this property is to purchase with sizeable land to be able to subdivide and put another house at the rear. I have not put an offer in on a property, but merely searching and getting organised for a pre-approval. I have a salary between 110k – 120k and quite stable, but no industry specific LMI benefits. The loan amount would be in the 600s.

I know that initial loan structuring is important if you plan to make your owner occupier home an investment property in the future. I would anticipate that I would live in the home and, when I have the ability to do so, subdivide and build at the rear and then move to living in that property. So a pretty classic set up. What I do from this point forward would come down to where I am at financially and I guess that’s where this post comes in, I want to make sure I start on the right foot.

I have two questions about where I am at so far in this process and discussion with the mortgage broker. I have been proposed a Bank of Melbourne variable P+I home loan at either 80% LVR or 85% LVR. At 80% the interest rate would be approx. 2.29% and at 85% it would be 2.34%. The annual fee would be $395 annually. For 85% LVR, there is a current offer to only pay $1 in LMI, which grabs my attention.

Question 1 - Generally speaking, how does this Bank of Melbourne loan sound as a competitive rate? I just want to check that I am being offered a good deal and not just the one that suits the broker. Just to note, I am more inclined to be interested in a big bank like this.

Question 2 – This question is more about structuring the loan. Am I right in understanding that it would be best to go for the 85% LVR to give me more cash available to be able to make progress towards subdivision and possible build of the rear property faster? I have read that having as much in the offset account rather than used in the deposit is the best option. But just want to clarify this.

Furthermore, are there any other things I should consider?

 

1. pretty good

2. It depends. Ideally you would want to go 105%, can you borrow from family, use a parental guarantee etc.

When subdividing you would ideally not use any cash, borrow the lot.

Subdivide then split the loan and then you will have a high deductible debt on the front property which is rented out and a low loan on the back property you are living in.

But what is ideal isn't always possible.

Next best would be to go 85% with no lmi and use an offset. Perhaps consider splitting the loan and having at least part of it IO - to offset this portion to improve cash flow

 

1 - probably the best out of the major lenders, there are some that is a little better, but we don't know your whole situation to compare other lenders.

2- if the back is used as an investment then you would borrow as kuch as you can for that portion.

 

What makes you think it would suit the broker? There is a misconception that brokers put you in a loan the benefits them, brokers are bound by 'Best Interest Duty' which basically means they need to evidence that the product and loan they recommend is in the best interest of the client, something banks and their staff don't have to do. So I'm curious as to your comment, where does this come from?
The broker surely showed you at least one if not two comparable offers from other lenders as well as reasons why they are recommending what they are?

Consider not paying more than the minimum loan repayments and stashing any additional cash in the offset instead, this will benefit you when you convert it into an investment property.

 

Thanks everyone! This is great information.

Lindsay_W you’re right. I should have thought more about my writing. My mortgage broker has been good. She has provided multiple options. It has also been great to be able to meet her in person too. I’m grateful for her work, I just wanted to make sure I was on the right track with the deal but didn’t write it well.

 

Thank you for your responses everyone. These are my two available options with Bank of Melb. I am willing to go ahead with either, but which would work best?

OPTION 1: 85% LVR, $1 LMI and multiple offset accounts.

Any refinancing or equity release would remove the $1 LMI offer if at an LVR above 80%.

OPTION 2: 88% LVR + LMI to pay (sadly no $1 LMI) and multiple offset accounts.

Which should I choose?

Additional information if required:

· Property purchase value – TBC but approx. 850k to 950k

· Cash available prior to purchase - approx. $437k

· Annual income - $110k to $120k

· Eventual cost of subdivision - approx. $50k

· Eventual cost of build - approx. $400k

· Possible rental value of front property - approx. $450 p.w

 

If you borrowed 88% what would you do with the extra money?

 

I imagine your question is probing the idea of opportunity cost vs actual cost. I guess I would have more cash available to:

1. Start the subdivision. If the purchase price was at or under $900,000 I would have cash available to do so but above I wouldn’t and would need to save.

2. Make minor improvements to the original home if required.

3. It could slightly fast track the opportunity to start building. But inevitably, it will take me a little while to save to do that, unless I’m wrong.

But this would all come at a cost of paying LMI at 88%, when at 85% it wouldn’t.

 

what is the actual cost of the LMI and the amount you will be left in your hands.

I doubt it would be worth it as the LMI would be too high.

 

In saying that though, even with the offset balance. It the loan is fairly high. So I’m not sure how much I’d be willing to use the cash immediately. But no.3 on my above post, I imagine would come slightly quicker when getting a loan with more cash available. Plus, as you have said, more money to deduct once it becomes a investment property. But it worth the cost of LMI being present?

 

The cost of LMI would be $18,000 - $19,000 from some basic calculations. I could be wrong?

The additional cash would be $28,000 compared to the 85% loan, I believe.

With that in mind, and your previous post, should I go the 85% and no LMI?

 

I can't answer should I questions, but that is a hell of a lot of LMI for such a small amount of money.

 

True. And I guess if I am following the principles of not paying down the loan urgently when it is an investment, then it’s not going to get close to 80% LVR for a little while, unless refinancing goes well quickly. So, without giving me advice, maybe I know the answer…85%.