Buying first IP and I'm trying to plan out when I'd be able to purchase again using equity. The common advice I see here is that you should borrow to 88-90% LVR and save your cash. Leaving aside serviceability. Wouldn't a higher initial LVR mean you'll need to wait longer for the growth before equity is available? Purchase cost = 500k Debt @ 85% = 425K Debt @ 88% = 440K Debt @ 90% = 450K Assuming growth of 7% pa Year 1 Property Value = 535K Equity available @85% = 3K @88% = -12K @90% = -22K Year 2 Property Value = 572K Equity Available @85% = 32K @88% = 17K @90% = 7.6K Year 3 Property Value = 612K Equity Available @85% = 64K @88% = 49K @90% = 39K I've calculated equity available as (Value x 80%) - Loan amount I think I've been pretty generous with 7% pa growth in a non booming market. But there is a huge difference between 85% lend and 90% lend. By year 3, 64K is just enough for a 400k property + costs. Questions. 1. How are you supposed to fund these additional properties if equity is insufficient? Use cash to boost the deposit for the next IP? - Won't the cash not be tax deductible? Doesn't all this mean that selection of the 1st IP, unless in the midst of boom, is of extreme importance. Buying something with 2 of the 3 (BMV, Rising Market, Add Value) would maximise the chances of high $ growth. An ordinary property in a non booming market might not allow you to accumulate IP's fast enough.
Find additional Income Streams perhaps Organic in food terms is probably good for us, but organic hold and pray in IPs isnt a reliable strategy all the time every time.............. its meant to be a supplementary stratgey , not sole/ exclusive. ta rolf
Actually a 4th option. If there is one property that you plan to live in at some point pay this loan down and then reborrow
@Jimmeh you're correct. Generally speaking, people don't generate enough equity to buy another property as often as some people would like. In most cases, lenders will only allow you to release equity to 80% of the property value. Additionally we're moving to an environment where beyond a certain point, you can only borrow 80% of the property value due to the lenders and mortgage insurers becoming more conservative. This means that at a certain point, you'll need to release enough equity to cover a 20% deposit and the purchase costs of about 5%. Up to 25% in total. Good growth performance over the long term might be 7%. Some years you might get significantly more, but there'll also be years were values stagnate or go backwards. That means, to buy another property of about the same value as the one you've got, you'll have to wait on average 3-4 years before there's enough equity to cover the deposit you're going to need. If you're employing a simple buy and hold strategy, unless you time it well or get lucky, people will need to simply wait a long period of time before they can buy again. Obviously this is overly simplistic. Early in the acquisition phase people can often buy 2-3 properties using LMI (depends on their income). You can also do things to speed up your equity gains through strategies such as renovation and development. Saving and paying off loans doesn't hurt either.
Am I right to assume the point where mortgage insurers draw the line is at maximum around $2.5mil in loans @ 90%lvr? Or is it $2m...cant remember
It's hard to get loans over 80% over $750,000/$1,000,000. $2.5mil is the maximum exposure for a lot of lenders, nothing to do with lmi.
Not that simple. There is a point where LMI won't touch you due to an arbitrary limit. This could be anywhere from $1M - $2.5M depending on the lender and the insurer. What I'm really talking about however is that the insurers have different servicing policies to the lenders. This depends on your financial profile. I've seen plenty of 90% loans fail with the insurer, but work when the borrower comes up with another 10% (and the insurer is no longer required).
Peter is exactly right - this is where lenders which have delegated underwriting authority (DUA) are useful for some scenarios. Basically each lender has their own borrowing capacity model, and so too do the insurers have their own different ones which can be in a lot of cases more conservative than the lender. You need to pass both. In the case of a DUA lender, they self assess base on their own policy and your file is not sent for assessment to the mortgage insurer, so in scenarios where the lender didn't have DUA and it was sent to the insurer you could potentially be declined, but if the lender has DUA you could be approved. Reason #45 of #999 that brokers aren't there to sort loans from cheapest to most expensive, but to provide valued advice which allows you to build a portfolio by getting loans approved, not declined.
