Noobie Equity Question

New to PropertyChat, but been a lurker at somersoft.

Planning to fund for my second investment property but confused about equity.

To make the numbers simple:
IP1 is valued at 550K.
Loan amount remaining is 300K.

LVR 80%, therefore available equity is 200K

2 questions that Im confused with:
1.Does this mean that I can use the 200K as my 20% deposit to fund my IP2?
2. Assuming the answer is yes, that means I can buy a property worth $1M with the 200K as the deposit and have a second loan of $800k.
Therefore, my first loan will now increase to $550K and my second loan will be $800K.

Is the above correct or am i missing something.

 

Not an expert, but from what I understand, nope, not quite. From what I understand, if your lenders LVR is 80%, then your maximum bortowings (and borrowing/purchasing cost if included in the finance) can only be 80% of the total value of the property values secured against the loans. So if you end up with $1000000 worth of property, your total loans cannot exceed $800000, after the purchase is completed, if that makes sense.

 

If the IP is valued at $550,000 then at 80% the loan would be $440,000. if you deduct the existing loan of $300,000 that would leave you with $140,000 in equity.

When you are doing an equity release make sure you set up a separate facility and don't contaminate the tax deductibility of the loans.

Also you can go higher than 80% but you are going to be paying LMI. However, Homeloans has a product whereby they are doing no LMI 85% IO on IPs.

 

1. As Shahin has said, you've got $140k in equity. But yes, you can use this equity to fund your next purchase.
2. Not necessarily - you'll still need to service the next loan. And you also need to consider buying costs as well.

In theory, you'd create a new loan split on IP1's loan, and use that as deposit and costs for IP2. You'd then get a loan for the remaining 80% from which ever lender you wish. Be sure that if you go to the same lender they don't cross collateralise you.

 

Thanks, that makes sense.
so the actual equity would be 140K, not 200K as Shahin pointed out.

If I use the $140K as the 20% deposit for IP2, then the loan amount would be $560K for IP2.
Im assuming the loan amount for IP1 would increase by $140K?

 

Short answer is yes.

Deposit amount isn't the only factor bank considers....servicbility is important as well.

If you can service the loan (Inc rental income from purchase), you should be fine.

 

What you are doing is leveraging 101 and very basis indeed but just note the following:

1. Do not cross securitise IP 1 and IP 2
2. Consider purchasing IP 2 at a higher LVR than 80%. Yes you are paying LMI but it means you have more funds up your sleeve for subsequent purchases or investments
3. Ensure that there are separate facilities against IP 1
4. Pull out the $140k equity sooner than later because you don't know when your situation will change or when the lender's appetite is going to change.

 

Thanks for all the answers!
I think at this stage, still trying to get my head around the high amount of loans.
My thinking was always to save up for the 20% deposit instead of using equity.

 

Remember that your serviceability will come into it for the second loan of $800k. This will depend on whether your first property is now cash-flow positive (assume that it is given the amount you have the loan down to).

Another factor is the yield of the property you intend to purchase. Yields are low in Sydney at the moment. Naturally any other income you have ( such as PAYG income ) is one of the main factors for serviceability.