Extracting Equity for Down Payment

Hi all, happy to be here. I hope you will please correct any false assumptions I have.

A strategy I often hear at seminars is:

1. Buy Investment Property (IP) #1
2. Refinance IP#1 when value has grown to extract equity
3. Use extracted equity as down payment for IP#2
   
4. Repeat process to acquire portfolio

My understanding is that there is a fixed limit to how much I can borrow (borrowing capacity) determined by my income and fixed expenditure. Refinancing to extract equity creates a bigger loan against IP#1 and therefore reduces the amount I could borrow for IP#2.

My questions are:

• The value of the target property never changes since cash in hand plus overall borrowing capacity is fixed. We are just trading borrowing power for down payment to avoid LMI?
  
• Refinancing would involve a hard credit check. How long after refinancing do you need to wait before the banks are happy to give out a loan, or does the frequency of hard credit checks not actually matter?
• How does the borrowing capacity actually increase, unless buying exclusively positive-geared properties? Wage increases happen so infrequently and by such small amounts that it's almost negligible.

Realising after writing that most of these questions are about financing. This overall topic is financing in relation to a strategy. Please advise if I need to delete this post and repost in the mortgages thread instead.

 

Find a good mortgage broker who can map out the funding strategy for second, third properties for you. How much you can borrow, obviously depends on your income. Even a slightly positively geared property doesn't increase serviceability.

As for wage increases, changing jobs or companies or promotions can help.

 

We all wish for that strategy if equity and borrowing capacity isn't an issue, but unfortunately you would be capped at some point.

These strategies assume that there is sufficient growth over a certain period of time to cover at least 10% deposit + stamp + LMI

To continuously increasing your borrowing, it's either high rental yield, increase in salary or paying down your existing loans. Or all 3 combined.

 

There is no need to refinance to do this. You just borrow more against the property as it increases in value.

Borrowing capacity doesn't usually increase but decease with each purchase. You would have to use some of the 300+ strategies to increase borrowing capacity slow over time. best one might be to keep repaying non-deductible debt down as soon as you can

 

You can increase your borrowing capacity by refinancing your loan over a 30 year term but this will be a slight increase. It will need to be a combination of proposed rental income plus wage increase to have a significant increase to your borrowing capacity.

 

Anytime you borrow or refinance there will be a credit check, it's unlikely to be an issue as you're never going to be borrowing 50 times in one year, but each time your credit score will reduce slightly.

It doesn't increase, even if you're purchasing positively geared properties it's unlikely to increase your borrowing capacity due to rental yield caps, rental income shading & buffer on debt repayments.
However different lenders have different ways of calculating your borrowing capacity, eg. you might be able to borrow $500K max with Lender A but Lender B would give you $1M.
Therefore the order of which lenders to use for each IP purchase is crucial to a strategy like this.

This strategy was used by a lot of investors prior to APRA changes to borrowing capacity. If someone is selling you this strategy that they used prior to 2015/2016 it's almost impossible to replicate to the same level in todays lending environment. It can still be used but don't expect to have '10 properties in 2 years' or anything like that.

 

Not your broker? Someone peddling sales?