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How to get equity from IP mortgage?

Discussion in 'General Property Chat' started by Ms Reno, 20th Apr, 2016.

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  1. Ms Reno

    Ms Reno Member

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    Hi, Just needing free advice again:

    IP value: $900,000, mortgage at $560,000 = LVR: 62%

    How can I get out $140,000. I want the mortgage at $720k (which is 80%).

    I've done 2 x top ups which funded a granny flat. Can I apply for top up to this amount, broker says they won't. I don't get it. It's my equity.

    Can a full re-finance free up this amount?

    The IP is + geared and I want the $140,000 for my own uses, to go on my PPOR actually, not for another IP (which I think is the problem). Will they only lend for 'income producing investment'?
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    The 2 top ups you did, did they come from that? So perhaps mortgage isn't at 560K any more?

    What do you mean by to go on your PPOR?

    Topping up to 80% has always felt like a simple process to me but maybe we're missing some info.
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You are using the wrong language which is confusing you.

    Instead of 'getting equity' think 'borrow money'.

    You want to borrow money from the bank. The bank will only lend you if
    1. the security for the loan is adequate, and
    2. they think you have the ability to repay without undue hardship

    A mortgage is something that secured the loan. You want to increase the loan to $720k. Its your equity, but the bank's money and they choose whether to lend you or not.

    it sounds like you might have the equity to be able to borrow, but perhaps you don't have the income to demonstrate serviceability.
     
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  4. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    But it's the banks money.

    You're borrowing money - so you need to be able to demonstrate to the bank that you can repay it.

    Perhaps look at whether another bank will lend you the money.

    Cheers

    Jamie
     
  5. Ms Reno

    Ms Reno Member

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    Hi, I appreciate the responses - first time investor - apologies for language too.

    1. Security: The valuation is easy at $900k.
    2. The income from this IP is $1130/week (house $680, GF $450), I renovated and built an awesome Granny Flat. Repayments on $560k (which is current loan, not before topups) is $501/week. At $720k, it is 80% LVR and repayments are $644/week IO. Even if I went P&I it's only $857 - definately serviceable. Partner and I work full-time too. It's easily financially self sufficient and + geared all the way. I just want it less positively geared and the free'd up $140,000 to reduce my PPOR loan on my OTHER house.

    Please help and again, my newbie-ness is obvious - asking for kindness and thank the free advice.
     
  6. JacM

    JacM VIC Buyer's Agent Business Member

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    I come across this confusion in people regularly. There is a common misconception that when a property goes up in value, the bank will congratulate you by giving you a cash donation of the amount by which the property has gone up in value. As the boys have pointed out, it doesn't work that way. You can apply to borrow a portion of the equity. It is a borrowing event that could be approved or denied. If approved, interest will be payable and there will be a debt owing.
     
  7. JacM

    JacM VIC Buyer's Agent Business Member

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    Hi @Ms Reno

    Even if the bank would lend to you, if you used the funds for this purpose, it would be using funds for a non-investment activity (putting money on your PPOR) and as such the interest on it would not be tax deductible.

    Out of interest, what's your beef with being positively geared? You are making money which has to be a good thing...
     
  8. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    It depends on the lender - some will restrict cashouts above very nominal amounts (20-30k) unless there's a clear purpose shown (providing a contract of sale to show funds being used to purchase a property).

    Some lenders will allow you to pull out $1mil without any evidence, so it just depends on the lender being used and whether there is a better option which still fits with your long time finance structure.

    You can't just plonk the equity release onto your mortgage to increase your negative gearing - tax deductibility is determined by the use of funds, not what type of property it's secured against. In that scenario the 'use' of the funds would be to pay down a non deductible debt - not a tax deductible use.
     
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  9. DaveM

    DaveM Adelaide Buyers Agent & KFC Strategist Business Member

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    If you want to get "your equity" you either sell, or release at the lenders discretion. All there is too it.
     
  10. York

    York Finance Broker Business Member

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    You plan to take the money out of the IP and inject it into your PPOR? What would the benefit of this be? It won't change your tax position. As Corey said the deductibility of the interest is based on the use of the loaned funds. These equity pull won't be deductible. You essentially just moving the funds around.
     
    Last edited: 20th Apr, 2016
  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    It's worth noting that you can't take borrow money against an IP, use it to pay of a PPOR loan and still expect the IP loan to be tax deductible. You can't use deductible debt to pay off non deductible debt as it changes the purpose of the debt.

    Equity is an important part of how much you can borrow against a property, but you've still got to prove you can afford the debt. How the bank views your affordability is very different to how most people view it. Either get your existing broker to explain it in more detail, or get a second opinion.
     
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  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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  13. Ms Reno

    Ms Reno Member

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    Thanks all - The links were appreciated. Won't change tax position- it won't be tax deductible.
     
  14. 1stepcloser

    1stepcloser Member

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    But couldn't you redraw equity build up in your IP to reduce the loan your paying on your PPOR?
     
  15. York

    York Finance Broker Business Member

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    No. See @Terry_w tips above.
     
  16. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    You can do it, but the purpose of the money would be to pay off a non deductible debt, therefore the loan from where that money came would also not be tax deductible.

    Most likely all you'd do is contaminate the existing investment loan so none of it would be tax deductible. Your overall financial position would be worse.
     
  17. D.T.

    D.T. Adelaide Property Manager Business Member

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    And the balances of the loans would remain the same. If you increase one by $140K to decrease the other by $140K you're not actually getting anywhere.
     
  18. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    You're actually going backwards given that the equity loan would be classed as investment by the bank (despite not being deductible), and thus a higher rate than the owner occupied loan.
     
  19. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    If you wanted to increase deductible debt and reduce your PPOR debt, you could look at implementing a debt recycling strategy - it's not immediate but will help over time.
     
  20. Timwest

    Timwest Well-Known Member

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    What would happen if you were to get a LOC from your IP's and purchase another "IP" then turn that "IP" into a PPOR in a years time?

    Would the interest be deductible then revert back to being non-deductible?