Gday legends, I'm hoping someone can share some a little bit of knowledge about the financial side of administering an equity release. My question put simply, is it possible to release equity with an existing lender and use that released equity to secure another property through another lender? (mindful of being stuck with multiple loans under one lender) From by basic experience, my thoughts were that refinancing (increasing our loan amount and LVR from 70% to 80%) would result in equity being released (cash) that could be kept in an offset account until it was required to secure another property. Our broker has advised us on a structure that sounds not too dissimilar however there's a loan secured against the equity release and I just don't quite understand the financial mechanisms at play here. For what it's worth, we wish to steer well clear from ending up in a position of cross collatorization. Many thanks and please let me know if what I'm asking doesn't quite make sense.
Most lenders want to see both applications together at the same time e.g. Loan 1 - Equity release against existing security Loan 2 - Pre-approval for new purchase Some lenders will be happy to release the equity into an offset/keep in loan account, others will want to control the funds and hold it as approval in principal until a suitable security is found for the pre-approval. And lastly, there are some lenders that will let you release the funds without seeing the full picture / unconstrained.
I think you are using the wrong language which is causing you confusion replace 'releasing equity' with borrowing money. That borrowed money cannot secure another property with another lender = you are borrowing from another lender and using the property to secure that loan. So what I think you are asking is can you borrow from lender A to use as deposit for a property which will be secured for a loan with lender B then put this as an example to help wrap your head around it. e.g. $300,000 owing with Lender A secured over the main residence worth $500,000 Borrow an extra $100,000 from lender A secured by the main residence. Then buy property IP for $500,000 and use that $100,000 as deposit with the remainder being $400,000 borrowed from Lender B secured over property IP
Yes you definitely can do an equity release with lender A, and use those funds to purchase a property with lender B. It's not a problem at all but you need to use the right lenders. It end up looking like this Prop1, Bank A Loan 1 - $xxx (Prop1 loan) Equity loan $yyy (used as deposit for Prop2) Prop2 (new purchase) Bank B Loan 1 $ccc (Prop2 loan)
If I can add question to this. Let’s say with my current lander I have $200000 equity . If I draw all $200000 from lander A this would be my loan B with current lander to be used for purchasing of investment. Than I go to lander B to borrow 80% . What to do if I do not need all $200000 released as loan B from my current lander, buying cheaper investment than originally anticipated.
lender. You cannot draw out equity, but can only borrow against property equity - you cannot borrow the full amount Loan Tip: Useable Equity Loan Tip: Useable Equity
Just want to ask if I want to borrow for IP from same bank I am refinancing with, will there be any X-colletral issue:- So PPOR has existing loans - $500K now as part of refinance one can borrow more as equity is available in PPOR. So with Bank A (new lender) PPOR may have 2 loans:- 1.$500K 2.$200K both against PPOR But if I want to borrow 80% of potential new IP with same bank (Bank A) and set a seprate Loan #3 then I can avoid the cross colletralisation ?
You can avoid cross collateralising securities with the one bank, but it is safer with 2 lenders rather than 1.
Of course lender , thanks for the correction. What I meant is I can borrow $200K against PPOR to use as deposit plus costs for IP. Borrow first from bank A , go to bank B borrow for 80% of IP. What to do if I do not use all of the borrowed funds? Do I just leave it in that account ?
You need to consider the taxation consequences. What you would do with leftover money would depend how you structure the loans really. Something to get advice on.
paying it back into the loan could result in problems as essentially the loan would be mixed at that point. But the ATO may let it slide.
Boring simple boiler plate strategy. Depending on the loan amount for the equity pull, and overall serviceability you may run into issues with " cash out". Cash out is where there is no specific or proven purpose for the funds from the equity property at the time of release. many lenders limit this at 100 k, a few a little higher, and only a small handful above 300 k Cross Coll is simples to avoid and detect before application submission Cross coll is usually ONE app, though some lenders will still try it on with the second ( purchase app) and still cross it to the PPOR. The training of " maximum client contribution" is hard to overcome for some older bankers/brokers. Objectively, if you have requested no cross coll, under Client Best Interest Duty, a broker must implement the structure that way. ta rolf
Hi Rolf , Usable equity is $350K , Servicabilty interest-only fixed term $850K or P&I $905K. Assuming we get IO for $700 plus approx $30 K for other costs we would need $170K. Can leftover 30K be left in the loan and used only for capital expenditure if and when required?
In case there is left over I would leave it in the loan and use only for capital expenditure, general expenses such as rates , water, insurance etc would use from rental funds which would go via the offset account. Is that assumption correct ?
if you leave it in the loan you haven't borrowed it from a tax perspective. But if it was deposited elsewhere and put back into the loan you might have issues.
Just double check your loan documentation if you plan on going direct, I've seen instances where bank staff crossed securities but told the borrower "they're not cross secured" but it was clear as day that all properties were being used as security, noted on the formal loan offer docs.
