Join Australia's most dynamic and respected property investment community

Noobie Equity Question

Discussion in 'Property Finance' started by Tyrone84, 29th Aug, 2015.

  1. Tyrone84

    Tyrone84 New Member

    Joined:
    29th Aug, 2015
    Posts:
    4
    Location:
    Sydney
    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.
     
  2. Jeah_

    Jeah_ Well-Known Member

    Joined:
    30th Jul, 2015
    Posts:
    185
    Location:
    Newcastle
    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.
     
  3. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    641
    Location:
    Sydney
    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.
     
  4. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,766
    Location:
    Perth WA
    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.
     
  5. Tyrone84

    Tyrone84 New Member

    Joined:
    29th Aug, 2015
    Posts:
    4
    Location:
    Sydney
    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?
     
  6. Be Developer

    Be Developer Property Developer Business Member

    Joined:
    19th Jun, 2015
    Posts:
    1,078
    Location:
    Australia
    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.:)
     
  7. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    641
    Location:
    Sydney
    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.
     
  8. Tyrone84

    Tyrone84 New Member

    Joined:
    29th Aug, 2015
    Posts:
    4
    Location:
    Sydney
    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.
     
  9. wombat777

    wombat777 Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    1,424
    Location:
    33°41'24.7"S 150°55'34.3"E
    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.