How not to cross x and fund my next IP loan - Advice needed

Hello everyone,

Finally signed up after the SS forum was locked for future posts.

I have read through some of the new posts but still unsure if my conclusion/thinking is right. I'm looking for a new IP and the best way to obtain finance without cross x the project and best way to fund the purchase + costs etc. I plan to develop this property in the future (e.g additional dwelling at the rear etc).

Current loans/debts as follows:

Both with CBA

2007 - IP 1 - Loan of 298K - Interest only fixed at 4.6% till Feb 2016 - Value would be 450K conservative. Rents for $350K and is currently neutral.
Has a 51K LOC against it which is owes 38K (12K free to use). This has never been for investment purposes, was/is used for personal expenses, bills etc)

2011 -PPOR - Loan of 440K (with 16K in offset) not fixed and is I/O - Value would be 700K conservative. Was originally with Westpac but refinanced with CBA in 2013. IP 1 was not used to fund/secure the PPOR.

Credit Card with CBA - 15k limit - Owe Nothing.

No other loans, store cards etc.

To purchase the new IP for about the 400-600K how would you suggest I best do this? Some of the options I came up with but not sure if their possible or the best way.

1. Apply for a new LOC against PPOR up to 80% meaning based on a val of 700K that would be about 116K. Use this as a deposit of 10-20% and to help pay for costs. The remaining amount I'd have to apply for like any other loan, e.g home loan with CBA or other lender?

If this is a scenario, once the deal is done, do you just have two separate loans? eg, An investment loan of say 400k and a LOC of 100k?

2. Use the 16K and 12K I have already somewhere in this equation? Prefer not as this is my buffer and don't want to release funds back to the banks which I have already.

I'm concerned serviceability will be my biggest hurdle (married with 2 dependents - 76K income for me, 10K for wife - rental income 18K, family assistance 5k). I'd prefer to have the property in just my name only for tax and protection. So going forward I need to be mindful of this.

I work in town planning so my long term goal is to develop smaller projects of 2-3 units. So trying to build some capital/funds to be able to undertake these kind of developments.

Thank You.

 

Idea 1 looks ideal. You'd end up with 2 loans on your PPOR, the existing $440k plus a LOC of equity to 80%.

Then you'd apply to which ever lender is suitable for the balance on the new IP.

 

Hi Jess,

Thanks for replying.

Do you see an issue with me using CBA again to apply and obtain the balance of the IP? Would I disclose to them the use of the LOC would be for a deposit etc on a IP in the near future and would apply in due course for a new loan.

Once the property is settled etc, do people often try refinance to roll over the LOC debt into the home loan to make it one loan? or do people simply have both accounts?

Does this borrowing structure cause any issues say in 2-3 years time when I want to borrow money to develop the property (eg, build a townhouse at the rear)

 

At this point it's probably not a big deal to put the next property with the CBA. At some point there are some very good reasons to diversify your lending even though it may cost a bit extra in interest rates. Essentially you don't want all your eggs in one basket.

In my experience people don't move the LOC into the IP. The more aggressive investors will simply borrow against the equity in the IP for more investments. There is merit in the idea however. At some point it's nice to have no debt against your PPOR (good or bad debt) if you've got more equity than you actually need.

The LOC will affect your overall LVR which will have an impact on how much you can borrow in the future (such as a development). This may or may not need to be dealt with depending on how the numbers pan out in the future.

 

Hi Peter,

Thank you for giving me that perspective and advice.

I had some concerns about this method, only because I was caught unaware a few years ago when I sold my first PPOR which had an LOC against it. I had used the funds renovations on an IP and used the account for emergency bills, expenses account for the IP. I needed it basically.

I didn't realize that when I sold the PPOR, I would also pay the LOC out also as the security (the PPOR) had been sold. I had to get a security substitution to keep the LOC. Lucky I was fortune enough I had the IP which had increased in value to be able to allow for this to occur.

I guess its important to think about when taking out LOC that if that asset is sold you will need to pay it out or try substitute the security (which can also trigger LMI etc if there is not much equity in another property).

 

That's the real problem that I see constantly, especially with the CBA. They give you the impression that the LOC is a magical think like a credit card and completely unsecured. You'd be amazed at how many people neglect to mention a LOC when I ask them what debts they have.

A LOC is just another loan account with a couple of features. The same way that a fixed loan is just another loan account with certain features. It's still a loan, the limit still counts against your LVR, it still needs to be paid for and it still needs security.