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Q from Newbie: Help me understand my broker's strategy

Discussion in 'The Buying & Selling Process' started by Katarina_Investor, 16th Nov, 2015.

  1. Katarina_Investor

    Katarina_Investor Member

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    Hi
    I was wondering if someone can help me understand my broker's strategy, which is completely different to what I was planning to make sure that hm... neither of our interests are compromised.

    Some background:
    I already owe a property in Syd West, equity of which (say 400K) I wanted to use to buy an owner-occupied property somewhere closer - looking at 1.2m, renovate (we are a sole trader in the building industry) and potentially sell in 2-3 years time. However, we are looking at the buy-and-hold strategy as well, depending on the market conditions.

    My idea was to use the available equity and borrow the remaining $800K through the same bank (lets call it B1). However, this is what our broker is offering us:
    1. Refinance the equity through an offset loan with a different institution (B2)
    2. Apply for an investment Home Loan (as he is convinced that we will not get $800K otherwise) with B3 by taking the liquidity from offset account from B2 as a deposit.

    While this might make perfect sense from a broker's point of view, how feasible is this option for us? We would like to avoid getting an investment loan because of the higher interest rate and intention to sell.

    Thanks
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    That sounds dodgy. The structure is okay (although a LOC would be better than an offset), but it looks like he's suggesting you take an investment loan and use the rental income and neg gearing (which you won't be getting) to service.

    Without knowing your incomes I can't say if there's another way - if you're happy to post your incomes we might be able to help out a bit more.
     
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  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Did you ask why there's a need to move lenders? Is B2 priced better than B1 or is it a policy reason? It would help if you'd disclose the lenders involved.

    I suspect the broker is proposing the new purchase be presented as an IP due to some serviceability constraints. You might need the rental income from an investment property to demonstrate affordability to the banks. This is speculation, you'd need to provide your financials to be more certain.

    There's nothing stopping you from going to the bank and declaring it's your PPOR after settlement. At that point they should reduce the interest rate accordingly.
     
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  4. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Sounds like you've hit a borrowing capacity wall - getting it done as an IP purchase is dodgy.
     
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  5. Katarina_Investor

    Katarina_Investor Member

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    Thank you all
    Okay
    B1 - ANZ
    B2 - St George
    B3 - unknown
    Combined income - $110K, one of us is a sole trader and one is on a permanent salary

    "You might need the rental income from an investment property to demonstrate affordability to the banks" -
    Yes, this was the explanation. Do you think it is worth asking him for a comparison? Borrowing capacity without potential rental income vs with?
     
  6. Katarina_Investor

    Katarina_Investor Member

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    Thanks, And what would be a non-dodgy method?
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Hard to say without knowing a whole lot more about your situation, but generally - not lying on an application tends to be non-dodgy :) Or actually renting it out once the reno's are complete.
     
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  8. Katarina_Investor

    Katarina_Investor Member

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    Oh, I see! They are quite big, so I wouldn't think they would be openly lying, but definitely something for me to ask - thanks
     
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  9. Katarina_Investor

    Katarina_Investor Member

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    Also, is refinancing for liquidity instead of using the equity a standard practice? I'm trying to get my head around the benefits
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It is the same as using the equity in essence, some times when servicing is tight it can make it easier as rather than doing it all at once in one application (which isn't ideal anyway as often you'd be cross collateralised)
    Ie - you do one application with one lender (B2) to get the equity funds which B3 (assuming NAB or CBA) will assess at a lower rate. It's a good way to increase serviceability when it's super tight. Much better than going to one lender where the whole lot gets assessed at 7.2%+.
     
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  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    They're likely getting you access to equity to give you funds for deposits and purchase costs. It avoids cross collateralisation and gives you a broader range of options from various lenders. Overall a good strategy.
     
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  12. Greyghost

    Greyghost Well-Known Member

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    Maybe the broker is trying to shift you from existing B1 because if you refi there he will only get the trail from the existing loan balance, no up front commission.

    Just playing devils advocate....
     
  13. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    That was my initial thought, but given the other things they're suggesting, it appears that they're doing some reasonably serious problem solving, trying to come up with a solution (even if elements of it aren't exactly above board).

    I suspect they're recommending the refinance for a specific policy reason, but again we'd need to know the actual lenders involved. There's probably a lot more to this deal than meets the eye.
     
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  14. Azazel

    Azazel Well-Known Member

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    This might sound weird, but I would suggest it's up to you to make sure your broker understands your strategy, or explains why you should go with their suggestion.
     
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  15. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    I have a good proposition

    Ask your broker why and get them to model it for you....

    That usually builds trust

    Chasing for specific results on generalised information will usually result in confused knowledge

    Ta

    Rolf
     
  16. Katarina_Investor

    Katarina_Investor Member

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    B1 - ANZ, B2 - St George, B3 - CommBank, but still undecided. Does this pose a clearer picture? :)
     
  17. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    It does actually :)

    ANZ is a fairly conservative lender if you've already got some properties. You simply may not service with them any longer. They do have pretty good cash out and self employed policies though. They have their niches.

    St George does service better. Their cash out policy isn't great, but not so hard to deal with if the broker knows what they're doing.

    In some circumstances the CBA then has a better servicing policy again. There's a progression here. I'm willing to bet that NAB would have come up if the CBA hadn't.

    I can see the logic in these recommendations, but as Rolf has suggested, you need to go back to the person who's making these recommendations and ask them to clarify their recommendations. The rest of us are only armchair speculators at this point.
     
  18. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Looks like he wants to maximise servicing and use 1 yrs financials.