Conditional Loan on currently owned property for IP

I'll try to make this as brief as possible. I talked to my bank and they said they could get me a lower rate on my loan as well as approval to pull out equity on my house for an IP. I paid LMI on my original loan (88 + 2%) and was looking to top up to 88 + 2% again, which I was told was doable - just had to pay the difference on the LMI costs of a few thousand dollars.

So the idea was, bump the loan up to 90% again, pull the equity into an offset, and then look for an IP. Also nice to have money in the offset just in case.

Bank guy came back today and said congrats it has been approved, but here are the conditions. We'll do a separate loan of $60k to pay for the "down payment" and then give you the rest when you make the purchase of the IP. Purchase has to be made within a year, max value of $600k+costs. The $60k goes into the offset against the currently owned house.

I haven't seen all the conditions, but will get the detail later in the week. This sounds kind of fishy, but he said they don't do what I wanted anymore. Of course, if I had all the money in the offset, I could use any bank I wanted for the second loan, now it would have to be CBA. They also are holding back on giving me the best rate on my current loan until I buy the IP. They'll still give me .2% off my current rate (4.05%->3.85%), but will give me another .1% when I buy the IP.

A bit more background - my original loan is through a mortgage broker who said he couldn't get me a lower rate. I was in the bank on other business and their loan guy must have been bored because he chatted me up, had a look at my account and said I can do better than what you're currently getting. A .2% reduction is certainly welcome, but not sure if it's conditional and would go back up if I don't buy the IP.

Does this sound strange? What should I be on the lookout for?

 

It sounds like he wants to cross securitise the loans once you purchase the new property.

Definitely a good idea to stay with the current lender for the existing property and reuse the LMI credits that you have up your sleeve.

Re the rate - its always best to arm yourself with what lenders' competitors are offering and then give the lender's discharge team a call and let them know you are leaving. Most lenders now have excellent retention teams designed to keep customers. The broker should be able to submit a pricing request now so the pricing is applied today. Failing that try the discharges team. Everyone needs a rate check after at least 18 months as most rates don't seem to be in line with the market.

The big thing here is don't cross securitise your loans - this will be very costly in the future.

There are also tax implications with the funds going into the offset against the other loan so do speak to your accountant about this.

Ideally the equity release funds should be sitting in either a seperate offset linked to the equity release loan or better still in the equity release loan itself.

 

Given you have paid large amount of LMI, it makes sense to stick to your existing lender rather than paying the LMI all over again - you need to do a cost vs benefit analysis on whether it would have been a worthwhile exercise?

It has been challenging having bank's give cash out in LMI territory, but we have succesfully done this for a number of clients, along with pre-approval for that next property (and these clients have gone on to purchase investment properties).

It may be that the bank is holding funds because you don't have a pre-approval?

In terms of interest rate discount, it depends on a number of things, including your aggregate lending, so they would have given you the interest rate pricing based on your current lending. It is generally for the life of the loan with CBA.

 

Thanks guys. It sounds like they're preapproving me to $600k + costs, but only releasing $60k as a down payment now so that I can secure the property.

Regarding the offset - he said it would go into the an offset against the current loan, so guess I'll have to have a chat to my accountant to see if that messes things up.

How will I know if it's cross securitised? Is this usually negotiable?

 

Interest will not be deductible. See
Tax Tip 1: Parking borrowed money in an offset account Tax Tip 1: Parking borrowed money in an offset account

Consider also whether the LMI would be deductible:
Tax Tip 33: Deductibility of LMI Tax Tip 33: Deductibility of LMI
Tax Tip 34: Deductibility of LMI on loan increases Tax Tip 34: Deductibility of LMI on loan increases
Tax Tip 35: Is LMI Deductible in These Situations? Tax Tip 35: Is LMI Deductible in These Situations?

 

With crossing, generally, there will be two loans - one relating to your owner occupier property, and another for the IP 105% (including stamps).

In terms of being negotiable - its not that its negotiable, its more to do with structuring finance correctly from the start. It could be very messy fixing it later, and lead to inflexibility.

 

You don't need to cross securitise - the banker probably doesn't know any better or its just easier to submit one application rather than 2. Either way let them know that you do not want the properties cross securitised (if thats how its set up) and to set it up separately.

Also putting the funds in an offset is not a good idea.

It sounds like its a credit assessed pre approval so thats always a good thing.

 

Thanks all - very helpful. My plan is actually to move out of the current house (which is a PPoR loan) and rent it out. So it will become IP1 in the very near future, and I'll be looking for IP2, as well as a rental property to live in.

I hadn't even thought of all the tax implications that Terry posted - I figured once my PPoR becomes a rental property, I could start deducting any costs - the LMI bump happens before that, so I'd assume that's off limits.

 

Sorry am I missing something here, how are the brokers here suggesting it's crossed if the $60k is being released now prior to purchase of the next property. If it happens prior, then it's only 1 property no chance of crossed.
The only issue I see so far is putting funds into current offset - you bank with CBA open up a separate new offset against this new $60k loan put funds in there, don't put any other funds in this offset.

Get pre-approval for the purchase - separate application.

Also the discounting makes perfect sense, you're still getting a little bit better than your current rate. As you're only borrowing $60k extra new funds you're not getting the best. That will happen when you buy the next and IF you go through CBA.

 

It is not clear whether the loan has been crossed or not which is why we are suggesting that he double checks this.

I find most finance professionals whether it be branch or broker cross securitise clients as a standard. Pulling out the $60k equity doesn't suggest its not cross securitised and it doesn't suggest that it is.

The part that leads me to think that it may be crossed when the OP said that he has to use CBA for the purchase and isn't free to use any lender. Again that is why its suggested for the OP to check this out.

 

@Shahin_Afarin if the $60k is taken now, before purchase it's not crossed because it's only 1 property. $60k for down payment now available in offset.

I believe the using CBA for next purchase is to get the extra discount.

 

I know you've all been waiting for the update. Here's the juicy details.

CBA recently added .15% to all their variable loans. Why? Because they like money. I was negotiating with the mortgage guy to try to get them to push down my rate even further, but then realised that a fixed loan would better suit me, as I no longer keep much cash in my offset.

CBA currently offers a 2yr fixed rate of 3.79% (PPoR, P&I) - I'm going to sign up for that, unless you guys tell me I'm crazy. The comparison rate is in the 5% range, but I don't know why, as there are no admin/setup/transfer fees. My payments go down and I end up paying slightly more principle per month.

The $60k would then be a variable loan with an offset that can sit there for up to a year as IO (at ~5%). I can use that to secure a house of up to $600k. If I don't want to buy a house, they either rewrite the loan or I give the $60k back. Doesn't appear to be any fees attached (except late payments, overdrafts, etc).

I did confirm that this would be cross-collatoralised. He told me that there is no other option but to do this. I could use some advice here.

So my options for the PPoR are:

• Stay as is (4.2%)
• Take the first offer (3.95%, which goes down to 3.85% if I buy an IP)
• Fix the loan for 2 years (3.79%)

Then I can also sign a loan for $60k to secure a house, which could eventually be rewritten into a larger loan for an IP. I don't know how this affects my LMI (paid @ 88% on current house) and how much more I'd have to pay. It appears they require the loans to be crossed as I have no other collateral - he did admit this can make things messy if you go to sell one of the properties. I assume it also makes it a huge PITA if I want to switch lenders.

 

He is wrong!

 

My recommendation is to engage a professional who know what they are doing. Its going to save you time and money.

There is no need to cross securitise in your situation.

I think Brady works for CBA and will structure the loan correctly so why not speak to him?

 

I did. And then I found out that my mortgage broker was making money off of me via a higher rate than CBA would give me directly. Apparently this is business as usual, so it's hard to trust someone when our interests aren't aligned. I know that mortgage brokers provide a valuable service, but I'd rather see a fair upfront fee than nothing up front and then thousands in "trails" through the life of the loan.

I'll table the cross-securitisation issue for now and bring it up again when I go to purchase, as there is nothing in the paperwork regarding the $60k loan. Unless I'm missing something, I'll sign the paperwork for the $60k loan (which ends up costing me $0 if I don't use it) and then change over to a 2yr fixed rate.

 

The interest rate on the loan would be the same whether going direct or via a broker.

 

That's not what happened to me. I went to my broker and asked if he could get me a better rate, and he said he couldn't. I was in CBA on other business and their mortgage guy chatted me up and said he could get me a better discount, which is why I'm in this situation.

The CBA guy told me that they don't like to talk about it, but that brokers are paid a trail, which is why he can offer a better rate, as he's only rated on service.

 

The rate is the same broker or retail - the broker needs to pull out his/her finger and submit the pricing request for you. That's part of a broker's job to do all the post settlement stuff like pricing requests, direct debit forms, amendments to loans, top ups, security swaps, etc. Everything except privacy sensitive stuff like internet banking.

Whether you deal with the branch directly or a broker they need to know what they are doing and have your interests at hand. Thats why I think you should speak to someone like Brady (if he works at CBA) and get a second opinion on rates, structure, etc.

He knows how to structure loans which is a lot better than what the other branchie is recommending to you.

 

A useless broker probably and the banker was spinning you some marketing spiel. He is on a hefty wage, plus taking up office space etc Sounds like he or she is on a bonus too.