Property Loan Structuring

Hi Guys,

I'm about to settle on a new IP and I would like to maximise leverage on the IP for negative gearing purposes. I was thinking of cross-collateralising with my primary residence to obtain 100% borrowing against IP, rather than go through LMI and pay higher interest rate. What do you guys think? Is there some other savvy structuring option that I'm not aware of?

Thank you

 

Don't cross. Draw down equity on your primary residence using a split loan and use the funds from the split as a deposit. Lots of good brokers here who can explain this and give more specific advice to your circumstances.

 

Don't cross. It will cause more issues down the track eg if your home value goes sideways, you won't be able to fix the structure.

Also, what if you wish to move homes?

 

There is a better way to achieve what you are trying achieve without cross securitising your properties. The issue with crossing is that you are giving a lot of your flexibility away to the lender. It will be harder and take longer when you want to extract equity, sell your property, etc.

Best to do an equity release against the other property and use it as a deposit for the purchase. The equity release should be a seperate facility and not a top up so you don't contaminate the tax deductibility of the other loan. Also borrow 100% plus other associated costs such as stamp duty, legals, etc.

Some lenders also price on the security rather than the purpose although I think if you are forced to use a lender that still prices on purpose then its better than crossing. LMI would not be applicable in this scenario as both securities would be under 80% LVR.

 

Thank you for the wisdom. I think I understood what you meant. So I think not to cross even though crossing may give a few bps off the interest but not worth the inflexibility.

Cheers

 

Absolutely although even in a cross securitised scenario they will apply the higher rate unless the lender prices on security rather than rate. The only thing you would be saving is the LMI which is the same if you structured it as seperate facilities.

That way if your investment property has increased in value and you want to do an equity release they won't order valuations on both properties - just the investment property. Same applies for when you want to sell one of the properties or refinance one of the properties.

 

Also, do you think it matters whether the home loan and investment loan are from the same lender if not cross-collateralised?

 

No it doesn't and thats where part of the flexibility kicks in. You can do the equity release against your owner occupied property and then have the investment loan with any lender.

I would also consider running the numbers on the new purchase and deciding on whether its strategically beneficial to pay LMI and save the deposit for future purchases or investments or whether to use all of it for the single purchase. Remember LMI is tax deductible for the first five years of the loan or the life of the loan (whichever occurs first). Get your banker or broker to run the numbers at 80%, 85% and 88% LVR.

 

Here is something I wrote a few years ago, covered lending, taxation and legal issues:

Terryw’s Ideal Loan Structure Terryw’s Ideal Loan Structure

and

The ideal Loan Structure where the first property is an investment The ideal Loan Structure where the first property is an investment

 

What’s the purchase price of the IP?

To keep it simple - let’s assume the purchase price is $100k and duty/solicitor costs are $5k

Apply for two loans.

Loan 1: $25k against your ppor (this is your 20% deposit plus duty/costs)

Loan 2: $80k against your IP (this is the remaining 80%)

Cheers

Jamie

 

Thanks everyone. I'll keep you posted as to how it goes.

 

Thanks. What I meant was is there any disadvantage in having same lender for home loan and investment loan when you are not crossing.

 

Yes. Even when a property is not crossed there is the all monies clauses to consider. Basically any property mortgaged to the bank is security for all debt to that bank, even without a legal mortgage tying it to that debt.

 

No disadvantage - if you can get the right rate, policy mix for the property, etc then you should be able to get a higher discount and potentially save on the pro pack fee unless its a basic product.

If you are going with the same lender then you really need to ensure they are submitting 2 applications as I have seen instances where customers were promised seperate facilities and then the properties were crossed.