Financing for 1st Investment property

Hi All,

I just joined the forum because I'm stuck and in need of some insight.

I currently have one house to my name, which is my PPOR. It's worth about $650K and I currently have $300K left on the mortgage. To be more specific, as it will be relevant below, my mortgage amortised amount is $386K but I'm $86K in front, so the outstanding loan amount is currently $300K.

I'm looking to pull out some of that equity to get my first investment property. For the investment property, I'm looking toward a regionally-located property of $350K max. The trouble is I'm not sure how the financing is restructured throughout the process and I don't want to commit myself to refinancing my current home loan if it's not necessary. More on that below.

I did speak to a mortgage broker whose suggestion was to pull equity out as an investment loan. That makes sense to me. But as part of this process, he looked at my current amortised loan amount of $386K and said we needed to reduce that down in order to maximise the available equity (because when going for the investment loan the bank would consider my current liabilities to be the amortised amount of $386K, not the actual balance of $300K).

As such, the mortgage broker wanted to refinance my current home loan on my PPOR at $300K, and then setup up the investment loan against my equity in my PPOR. I'm not sure if this would be done simultaneously, or whether the home loan would be refinanced first and then the investment loan established once that is complete (any insights would be greatly appreciated).

Now, the mortgage for my PPOR is with Ubank, where I have an interest rate of 2.34%. To refinance my mortgage, the mortgage broker crunched some numbers and spat out some home loan options but they weren't as good as Ubank (the interest rates were lower but the comparison rates were higher). Due to my reluctance to refinance my current mortgage, I didn't proceed.

Since the purpose of refinancing was to reduce my amortised amount from $386K down to $300K, I called up Ubank and they confirmed that they are able to reduce my loan facility and amortised amount to around $300K, thus freeing up more equity.

So, this has left me with the following questions;

1) once I have Ubank reduce my amortised amount to $300K, what should be my next step? Do I go back to the mortgage broker and have him organise the investment loan, or should I just do this myself after choosing the best investment loan I can find?

2) now this is my main query; once I have the investment loan, what's the process for getting a mortgage on the investment property I wish to buy? From memory, the mortgage broker's plan was to take out an investment loan of about $90K, which would give me enough for a 20% deposit on whichever investment property I buy plus cover expenses. That makes sense to me. But I don't understand what comes after that and how I get financing to have a mortgage for the remaining ~$280K ($350K minus the 20% deposit).

3) should I reduce my amortised amount with Ubank then just go back to mortgage broker to have him sort out the investment loan as well as the new mortgage that I presumably have to take out on the investment property?

4) My understanding is that I should be able to pull out equity up to 80% of my property value. 80% of my current PPOR property value (worth $650K) is $520K. Subtracting my mortgage of $300K means I could potentially pull out up to $220,000 (at least such is my understanding). So, instead of pulling out $90K in equity to buy one investment property, should I be looking to pull out ~$200K to buy two properties? I make decent money (~$120K p.a.) so I think I would be fine covering the repayments on the $300K PPOR mortgage loan and ~$200K investment loan (with rent from the investment properties covering most, if not all, of their associated repayments).

I realise these are ridiculously basic questions but hey that's where I'm at, and it's a roadblock that's costing me every day that I'm stuck behind it instead of being in the market.

Thanks!

 

UBank don't deal with mortgage brokers, so if you want help specific to UBank, you'll need to approach them directly. There are also lenders with comparible rates available to mortgage brokers.

I'm not sure if you actually do need to reduce your PPOR loan to $300k. It may be possible to simply split the existing loan to get the same outcome. A simple split would also be a lot cheaper.

It's hard to give specific advice or suggestions without a more in depth analysis. This really depends on your borrowing power and equity positions.

The best suggestion I can give you is to contact one of the brokers from this forum to get a second opinion.

 

I feel like you’re the type who wants simplicity here. Some of the brokers are going to throw up complicated scenarios which work, but probably do your head in.

1) fine to reduce the loan limit to $300k. Ask UBank for a new loan to cover deposit and stamp duty on the investment.

2) You get an 80% loan on the new investment property in the same way as you got your loan on your current property. You need to be careful here, because the bank will likely simply cross your properties together so you will need to repeat yourself several times to the bank “DO NOT CROSS” over email in blood red caps lock.

This is why I like going into a branch… they will absolutely stuff it up and you can yell at a person in person to fix it. UBank May be harder to argue with a robot(?)

3) You can do that if you don’t want to do (2)

4) you can also do that too… I would take two loans of $110k in your situation, rather than one of $220k… makes it easier to track which loan was for which property etc.

 

Think about it , you want to reduce your loan by $80k at a rate in the low 2s to be about to borrow $80k more in the high 2s or 3s.

 

Yep. Some decent structuring advice might save a lot of money in this case.

 

Long- story short.

You'd need to refinance and draw an equity loan for the investment loan- this is correct.

2.34% isn't the absolute best rate right now so there might be other options at 80% or lower.

 

Thanks for the responses so far.

I'm perfectly fine with complexity. I'm just trying to get some information up front to avoid refinancing (at the broker's benefit) if it's ultimately not necessary.

I queried the broker about redrawing the $80K I have available as redraw. I was advised this isn't the best approach as although the redrawn money has a lower interest rate associated with it, it cannot be claimed as expense for the investment. In contrast, although the investment loan would have a higher interest rate, the costs associated with pulling out the equity as an investment loan can be written off as an expense. That's what the broker told me. If that's not the case, then I'm certainly keen to hear the counter argument.

That's why I'm here

Interest rate isn't my primary focus. I'm trying to learn about what to expect from the process. What needs to happen. I'm quite happy to refinance away from Ubank if that's the best approach, but as it currently stands I'm not sure if that's actually necessary (given that Ubank can reduce my amortised amount) or whether it's just the broker trying to maximise their own commission.

I'd like to get a few investment properties to my name, paying themselves off through rent, so that down the track they're generating a passive income. As it currently stands I have plenty of disposable income for paying off my current mortgage in advance, but I gather that that money would be better directed toward acquiring investment properties.

Okay, so this sounds to me like refinancing through the broker and having them establish the equity loan is the way to go. However, can you comment please give your thoughts on the above posts that appear to indicate that it would be better to redraw from my Ubank mortgage than establish an investment loan?

 

I was thinking the exact same thing.

Also, don't get caught up on the rate as the most important metric, it is not, maybe 3 or 4 on the list when embarking on property investment financing.

 

This is why you shouldn't seek tax advice from an unlicensed broker!

 

You're not going to get the advice you want from here. From your initial post I can't tell you what the the right answer is, there's not enough information. If you want good advice, a conversation is needed, not a few post.

 

Hi All,

Just dropping in with an update and seeking some perspectives please. Since my last post I have spoken with two different mortgage brokers.

The first broker's approach was to refinance while borrowing 100% of the purchase price for the investment property against equity in my PPOR. This approach was going to cross the properties. As my preference is to not cross (per prior suggestions to retain flexibility), I spoke to a second broker.

For example's sake, my PPOR is valued at $800K and the outstanding mortgage is $290K. In order to not cross the properties, the second broker's approach is to:

1) refinance my PPOR up to 80% LVR, which is $640K.
2) then split the loan into; (i) a $290,000 owner-occupied loan against my PPOR, and (ii) a $350,000 investment loan (he'll try for owner-occupied rate but it may end up at investment loan rate).
3) then obtain approval for a loan that will cover the remaining amount needed to purchase an investment property valued at $400K - $500K.

So ultimately I would end up with 3 loans/accounts with each having a minimum fortnightly/monthly repayment;
(i) a $290K owner occupier home loan against my PPOR (not tax deductible)
(ii) a $350K investment loan against the equity in my PPOR (tax deductible)
(iii) a $50K - 150K investor loan, dependent upon IP purchase price (tax deductible).

Does this sound like a reasonable / typical approach to take toward the financing of an investment property? Is this needlessly complex or is it the bare minimum for avoiding crossing properties?

If not, I would very much appreciate suggestions on how you would go about setting up the financing given (i) that my goal is to purchase one investment property now and then acquire additional properties down the track, and (ii) the situation example details below.

Situation example details:
PPOR value = $800K
PPOR outstanding mortgage with Ubank = $290K
Currently available redraw with Ubank = $90K
Investment property price range = $400 - $500K

Thanks!

 

This is a stock standard set up for starting out on your investment property journey.

I will add, that if serviceability permits just use 20% + costs for the 400-500k purchase from the 350k equity loan against PPOR and leave the remainder as buffer/future IP deposit plus cost acquisition.

 

The second broker sounds a lot more competant than the first.

 

Would rather have 80% of the Investment loan secured by the investment property itself, 20% deposit + costs (stamp duty etc) secured against the PPOR.
Rinse and repeat for the next IP purchase

 

Okay, great to hear. Thanks for that insight, I really do appreciate it. Feels like I'm getting somewhere now.

Hmmm, I see. For a $450K IP the broker advised me that "associated costs" (stamp duty, conveyancer fees, government fees) would be approx $19,500 and then there's the 20% deposit ($90K), meaning I need $109,500. So you're saying that after the loan split, I should only take $109,500 from the $350K (leaving my with $240,500), and then increase the amount borrowed in account 3 (above) to complete the IP purchase. Then I can dip into the $240,500 to repeat the process for the next IP purchase. That makes a lot of sense. I'll query the broker about it. Thank you very much for that suggestion.

I'm relieved to hear that!

 

Okay, great. I've just gotten my head around that following Colin's post. Thanks!

 

Hi All,

Valuation on my PPoR has come back at $850K. My broker has looked into available lenders and based on my situation/goals has recommended me a Macquarie product. The refinance and loan spit would result in:

Account 1: a 290K owner-occupied loan against my PPoR.

Account 2: a 390K P+I investment loan against my equity

The broker notes that:

1. Macquarie have a quick turnaround time
2. I show affordability under Macquarie's refinance parameters
3. these Macquarie accounts would allow me to utilise multiple offsets on my loan to seperate my banking/accounts while saving on interest
4. this Macquarie product has an annual fee of $248 and no other ongoing charges (I note that it appears the owner-occupied account and the investment account would each have a $248 annual fee)

Details of the respective accounts can be seen in the uploaded images. I would be grateful for people's thoughts on these Macquarie products. Are they competitive for the features they provide?

 

Surely your broker gave you 2 other lenders as a comparison?
Trust your broker knows what they're doing and give them some credit!

The rates and fees are good, their turn around times are great but the best thing about Macquarie is their cash out policy, much easier to get that amount of equity out compared to other lenders.
So what's your priority in a loan, interest rates & fees, or ability to access that equity?

Have you thought about going Interest Only on the investment debt so you can prioritise paying down the owner occupied debt?