Loan structure

Hi,

First post after reading though here for a bit.

I am looking at a 1st investment property and want to get some clarification on home loan structure.

The broker I have used for my own home set off some alarm bells with recommending cross collateralisation (or at least not advising against it) with the reasoning that it isn't really worth worrying about something that may or may not be future problem.

That aside I am trying to get my best understanding of structure myself to be alert to what people may recommend and knowing if they are telling me good bad advice.

I have a PPOR worth approx 440k with 200k remaining on the loan.

Im I right with believing the following being a correct structure to proceed with?

Re-finance to a split loan of 200k (Personal, likely P+I but could be IO) and 150k (investment, IO) - both with the same bank and both with PPOR as the security.

Then I can use the 150k as a deposit on a seperate investment loan application (same or different bank) which is securitised by the Investment property only. (while awaiting that purchase, the 150k would be paid back into the IP loan as much as possible without triggering closure, then redrawn when needed for the deposit).

In some ways that also still appears cross securitised (as part of the IP is stil securitised by the PPOR), but is the idea that as the IT increased in value you could simply have it revalued and have the securitised property changed to the IP? And that because it is not 1 loan with security of 2 properties that is a simpler process to alter when equity allows?

Thanks in advance for advice!

 

Pretty much correct on structure : You can refinance and cash-out up to 80% LVR 440 > 352k. Split 1 00 200k / Split 2 INV 152k. IO generally i don't recommend - why pay a higher interest rate and reduce your servicing. At the end of the day you want to own your property. The lender calculators limit you to the number of properties (again sit down with a broker to go through the scenarios). Put in a 2nd application at the same time as a pre-approval for an INV loan for the new purchase. The properties should no longer be crossed and ensure the applications have this written on them - Do Not Cross. Cheers Peter.

 

The structure you've described suggests that the broker is not cross collateralising the two properties. It looks like they're doing thing property.

No need to be alarmed because they didn't bring it up. Avoiding x-coll is something that's standard practice in my office, I generally don't even think about it unless there's a reason.

 

Thanks Peter,
can i please clarify a couple of points?

1- the avoid IO I assume you are referring to PPOR not the IP (in which case that is the way I would elan anyway unless there was minimal interest difference and I would be intending on still paying extra funds to pay it off. I assume you support IO in IP?

2- "Put in a 2nd application at the same time as a pre-approval for an INV loan for the new purchase. The properties should no longer be crossed:

This bit im not sure I follow, can you please try clarify what you mean?

That is not the structure he recommended but the one I had believed to be right myself.

He seemed to suggest this was a negative because it would involve 3 loans.

His suggestion involved 1 the OO loan then 1 total loan for the IP, securitised by both properties. When I asked about this (I had thought this was just early modelling and not what he would actually recommend), that when he said he wouldnt be concerned with cross collateralising as it isn't really worth worrying about something that may or may not be future problem. Also that there could be benefits in this structure as some banks may offer a better rate for loans >500k for example. He did say he would talk me through the options more as we got to that stage but this just concerned me.

 

Sorry, I misinterpreted...

If that's accurate, then it's definitely cross collateralising and you should find another broker. It's quite rare that cross collateralisation is justified and I'd expect a detailed reason for it if it was recommended.

The loan structure rarely has an impact on the pricing benefits.

There's arguments for and against interest only repayments. The tax outcomes aren't significant but the cash flow and serviceability implications can be. There's no simple answer. This question really requires an in depth discussion about your circumstances and goals, weighed against what is practically achievable for you.

In this context the purpose of the pre-approval is usually:
* To make it clear what the funds from the equity release from the first application will be used for. This often gives lenders a lot of comfort around handing over a large amount of cash.
* It gives you confidence that you can qualify for the purchase itself.

 

Thanks Peter, so on this part, the suggestion is when refinancing the PPOR loan to have the 200/150 split (both securitised against the PPOR), at the same time apply for pre approval for the IP loan amount?

Then take out the 200/150 split loan and then when ready activate the pre approval?

If thats right im still not sure how the 1st 150 of the IP loan isn't securitised agaisnt the PPOR initially at least? This is if the IP loan is 105% say to cover costs, 25% would be securitised against the PPOR until the IP raises enough to convert that?

 

It would be ideal if you can take the initial split loan against your home straight away so you've got cash on hand for the initial deposit. Here's how I'd describe it:

Secured by your existing PPOR:
$200k - owner occupier loan, replaces the existing loan.
$150k - investment loan, equity release to give you a 20% deposit and purchase costs for the IP. This is realised as cash in an account accessible to you.

Then you purchase the IP:
New investment loan for 80% of the IP value.

Each loan is secured only by the property as described above. That avoids cross collateralisation but you're still borrowing (and should receive tax deductions for) the full purchase price and costs of the IP. When the IP has increased in value sufficiently, you could do a security swap for the $150k loan to move it from the PPOR to the IP (assuming they're with the same bank).

 

The reason to refinance and do a pre-approval is to ensure that the lender is happy to lend you the total funds. No point refinancing. Two loan - No Crossing of securities. Apologies in not clear

Structure:

Loan 1 : Refi PPOR Security 440k / Max LVR 80%
Split 1 : 200k Owner Occupied Rates
Split 2 : 150k Investment Rates - as this is the purpose - tax deducatable

Loan 2 : Pre Approval New Security - Value X Loan Y - Investment - P&I

If you get approved then proceed with Refi and you will have 150k sitting your redraw - ready as your deposit. Now you can buy a property knowing your max purchase price with Loan 2.

 

That makes sense and is in line with what my thinking was.

If the 150k equity loan for a deposit was more than was needed, how would you suggest the 3rd loan be taken
- eg theoretically that could be up to a 600k loan if serviceability also allowed (750k property - 150k deposit + 600k loan = 80%), but the property you wanted with costs was only 600k.
- would you then recommend taking out only a $450k loan at only 75% LVR on the INV loan, leaving the equity loan fully drawn
- would you recommend taking the full 600k loan- in that sense paying the 150k deposit but then having 150k extra returned from that investment loan that was then paid straight back into the equity loan, essentially eliminating that portion that is secured against the PPOR
- or have I missed the point somewhere there?

 

excellent, thanks for clearing that up!

"If you get approved then proceed with Refi and you will have 150k sitting your redraw - ready as your deposit."
- do banks generally provide the IP portion of the loan in that form, where it is simply fully offset as a redraw from the start? or do you need to receive it into a bank account and pay it back in (being careful not to close the loan)

Sorry for all the questions but this is all really helpful to clarify my thoughts and is much appreciated!

 

The questions are a bit to open ended to answer specifically. I'd recommend the figure for the $150k equity release actually be a figure in line with your overall goals and borrowing power.

Keep in mind that you haven't accounted for stamp duties and purchase costs in your calculations. For a $750k you'd have $150k for the 20% deposit, plus about another $40k for the costs. About $190k in total.

 

The lender should do the refinance, even if you have not found a property to purchase.
Once the Refi occurs the 150k will sit in the redraw until you want to use the funds. You may need to start paying the loan down - captial - however their will be no interest until you start to draw on it.

PS: You do not require an offset on the 150k at this point in time. Since you have 200k as OO - all extra repayments will go here.

Hope this helps.

 

This is assuming a LOT about the clients strategy.

DO they want to own their property?

If all you're considering is cost - on the face of it P&I looks better. But when you look at big picture strategy, asset accumulation, risk management...

It's not one size fits all.

 

IO on the investment loan is a much better structure if client can afford to do it, especially when they have non-deductible debt to pay off first.

 

You are correct it is the clients decision on the investment strategy. From a borrowing perspective lender calculators assess I/O loan on the remaining P&I term and with a higher interest rate reduce the amount the client can borrow. Therefore there is no point going I/O on a loan when servicing is based on P&I. In the long run there is no benefit to the client. Unlike the good old days where I/O loan were treated differently.

Example : Servicing Only
500,000 P&I 3.3% @ 30 years = $2,189pm
500,000 P&I 3.55% @ 25 years = $2,516pm (Remaining P&I term, after I/O period expires)
There is a difference of $327 in servicing which needs to be found. This could be the difference in getting the loan or not. Why pay an extra $1,000 in interest, even if you get some back in your tax.

Cheers
Peter

 

I'm aware how servicing works as I am a broker myself and I completely disagree with you that there is no benefit having IO on an investment loan. (not sure what good old days you're referring too, how long have you been a broker? Serious Question)
Servicing calc Vs real world cash flow are two different things.
In real terms the additional cash flow created by having IO on the investment loan can help reduce the principal of the non-deductible debt.
I'll use the figures above as an example of the real world difference;
$500K P&I @ 3.3% @ 30 years = $2189.78 per month
$500K IO @ 3.55 @ 30 years with 5 years IO = $1479.17 per month
Total Cash flow difference of $710.61 per month or $8527.32 per year over 5 years that's $42,636.60 that could be used to pay down the non-deductible debt (PPOR Debt) while also maximising tax deductibility of the Investment loan.
Clear benefit

 

when considering serviceability is business income considered? (and business is a company that have 100% ownership of)

eg if business makes x profit is the personal income + additional business profits not actually passed out as wages considered or only that apportioned to income for the previous period?

 

If you get paid from the business, that can contribute to income for sure. Usually the recent years profit can be counted as income.

 

There are lenders that don't treat debt that way, and paying P&I will kill any advantage those lenders might bring when building a portfolio.