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How to increase my borrowing capacity

Discussion in 'Property Finance' started by Judi, 10th Jun, 2016.

  1. Judi

    Judi Member

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    Hi everyone.
    I am a newbie investor, and would want to increase my borrowing capacity.

    I currently have my PPOR paid off without mortgage, worth say 800k conservatively, an investment property about 600k with 400k mortgage. Our combined salary is not high, is only about 100k pre tax. I am wondering is there any ways for me to keep my PPOR and maybe borrowing against the property?

    Our mortgage broker said to take out a loan, we need to have both cash flow and equity, cash flow being the salary, and equity is the house. We want to borrow another 800k, is that doable ?
     
  2. Redom

    Redom Mortgage Broker Business Member

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    Hi Judi,

    You will need to run the numbers based on your income and expenses. To release equity, you will need to show the bank that you can repay any equity release debt. The deposit/equity availability isn't the issue here given the large owner occupier thats paid off. Your mortgage broker who has a thorough view of your situation and numbers should be able to model this out for you to determine your maximum equity release figure.

    As a guide, to release 80% of 800k - $640k against your owner occupier for investment use, you will need to show income to service that additional debt.

    If you are able to do this, its also important for your broker to work out exactly how you can continue borrowing with the equity release. It may make sense to use the equity release as deposits for further investments, which may require additional debt. There are strategic ways to maximise and extend your overall borrowing capacity here - e.g. utilising the right mix of lenders in an ordered manner.

    It may also make sense, pending review of your numbers, to take it out of the investment property only. If your borrowing capacity review indicates a relatively small purchase price for another investment, you could leave the PPOR unencumbered and take out an 80k equity release on the IP and use it for a cheaper property. This way your PPOR remains unencumbered (asset protection).

    Once you have a full information set here, it can guide your purchase prices and investment strategy.
     
  3. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    It will come down to 1. you living expenses and 2. how much rent are you receiving from the current property and the proposed purchase.

    I just ran some very rough numbers assuming you have no kids, low expenses and a 3.8% gross rental yield and under those assumptions it is possible. Even with two kids you should still be able to borrow an extra $800,000, if you are getting a decent rental yield.
     
  4. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Hi Judi

    Welcome aboard.

    It's impossible to gauge your borrowing capacity without knowing the finer details of your situation (your living expenses, liabilities, proposed rental income for the next property, dependents...the list goes on).

    Your broker is right - in order to borrow - it's not just enough to have sufficient equity. You also need to be able to demonstrate a capacity to pay back the new debt.

    Cheers

    Jamie
     
  5. Judi

    Judi Member

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    Thanks for answering !!
    More infor: we are in our late 20s and early 30s, so no kids just yet.
    The rental yield is good, for our current IP, it's positively geared, rental is 2k per month, interest 1k per month.
    We have been servicing our currently IP loan just little over a year, our PPOR is bought with cash. So not sure how I can use the equity in the house.

    Our situation is ( I am starting to blabbering now,,,) our PPOR no longer suit us for a place to live, it was bought nearly ten years ago,this place is big, but we don't need that much space, and far away from his work, commute can be 2hr both ways. However this is a 3br 2bath place in melbourne's blue chip suburb, so I would still want to keep this one for appreciation purposes.

    But I would want to borrow against the house, for two inner suburb units, somewhere it's more convenient for his work, and cheaper, smaller, with an investment potential.

    I am wondering whether this is doable?
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    That sounds do-able for sure. You'll be able to take the rental income from your current PPOR, the new unit you're not living in and the existing IP into account for servicing. Find a good broker to guide you - they'll be able to work out how much you can borrow, and map out the finance for the two unit purchases.
     
  7. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    So you will end up with three investment properties and $1.2m in debt, looks doable.

    The first step would be to get a valuation done on the current house (a broker can organise this for free) so you get an idea of how much it would rent for, then using the proposed rental amount calculate your borrowing power. That will give you a baseline, then you can add the potential third rental property and calculate again.

    You would want to go with a bank that allows a negative gearing add back, and you could also look at splitting the loans across multiple banks. Also worth thinking about debt recycling as you will probably end up with some non-deductable debt once it's all said and done.

    If you have any questions please let me know :)
     
  8. Judi

    Judi Member

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    THanks Simon,
    I will google some of the terms you mentioned first,,,,;)
     
  9. Christina46

    Christina46 Member

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    legallyblonde and Terry_w like this.
  10. albanga

    albanga Well-Known Member

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    Where is your PPOR and where does your husband work?
    Just curious as you mentioned it's worth 800k in a blue chip suburb which would indicate your husband must work a fair way away as he would be going away from the traffic into the CBD (unless ofcourse he works on the opposite side of the city in which case the long delay is getting from one side to the other, thankyou moronic government for scrapping East/West!).
     
  11. Scott No Mates

    Scott No Mates Well-Known Member

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    Victorian's got the government it elected ;) [​IMG]
     
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  12. albanga

    albanga Well-Known Member

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    Haha not the one I voted for!
    Not a day goes by I'm not stuck in evening traffic shaking my head, sharing the road with hundreds of trucks that are traversing the city because they can't get from the East to the West. Idiots!
     
  13. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Hi Judi


    While it may be more emotionally comfy to convert the existing PPOR to an IP, it probably wont fly for you.

    The paid off PPOR is a great thing, even greater would be the the principal sitting in offset v the loan, bur ce la vie.

    While I believe you can likely borrow the money forthe new place,and keep the old one on the basics presented, it makes little financial sense to do so.

    1. Pretty much all the rent from the current PPOR will be taxable
    2. All the new borrowings will be non deductible

    To get around this,we would typically suggest a spousal sale, thus sans stamps, to regear the current PPOR, and make the new borrowings more tax effective but.......

    based on the 100 k combined wage thats possible but not sensible, and selling free of CGT, debt recycling into the new PPOR and buying some Ips after the new ppor would likely make for a better outcome.

    Your quest isnt just around borrowing issues.......its somewhat simple but not obvious.

    ta
    rolf
     
  14. Judi

    Judi Member

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  15. Judi

    Judi Member

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    PPOR is in Blackburn, while he works in toorak,, it may sounds all on south east side, but traffic on toorak rd is horrible
    & YES. The government is silly not to build that link,, & they have to pay a fine to exit the contract !! Urh.
     
    Last edited: 11th Jun, 2016
  16. Judi

    Judi Member

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    Hi Rolf,
    I did research a little on turing PPOR into a IP, In most cases financially it's not worthwhile, especially on the Free CPT,, I was hoping the equity in the house could let us borrow a bit more,, still try to figure out the best way to do this ,, : )