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Refinancing - do you borrow your own money???

Discussion in 'Property Finance' started by Azazel, 6th Apr, 2016.

  1. Azazel

    Azazel Well-Known Member

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    I'm trying to get my head around something when refinancing.
    An example.

    Let's say you bought IP1 for $240,000 using a 20% deposit of $48,000.
    Then you bought IP2 for $300,000 using a 20% deposit of $60,000.
    The total for both deposits is $108,000.
    The properties went up over time, and you decided to refinance so you can buy another IP.
    For this example, let's say both valuations came back at $325,000. And you decide to change banks, and to only use a deposit of 12% and pay mortgage insurance (capitalised).
    The deposits for the refinanced loans are $39,000 x 2 = $78,000.
    You had previously paid $108,000.
    What happens to the outstanding $30,000???
     
  2. EN710

    EN710 Well-Known Member

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    you have it in your account plus the equity?

    IP1 $240,000 - loan was $192,000
    Refinance loan $286000 - extracted a total $94K

    IP2 $300,000 - loan was $240000
    Refinance loan $286000 - extracted a total of $46K
     
  3. Perthguy

    Perthguy Well-Known Member

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    What is the "deposit" for when refinancing? I have refinanced three times but I only use a deposit when purchasing, never when refinancing. That could be why your numbers don't add up.
     
  4. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

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    Trapped as equity in the first 2 x IPs.

    Generally you can never get your original deposits back when doing 80% LVRs even after large CG.
     
  5. tobe

    tobe Well-Known Member

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    Do you mean refinance to 88% of the properties value? Because you dont actually part with a deposit when refinancing, you just leave 12% of the properties value with the bank as equity....
    The deposits for the refinanced loan is just equity of $78k, whereas previously you started with equity of $108k.
    However immediately prior to the refinance, that initial $108 had grown to $260k.
    During the refinance, you borrowed an extra $182k, some of which was made up of your initial deposit (108k-79k=30k)
     
  6. tobe

    tobe Well-Known Member

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    note, this is sometimes called the velocity of money. How long it takes for an investment to return the initial cash outlay.
     
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  7. Jason Tyrrell

    Jason Tyrrell Well-Known Member

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    Originally IP1 had $192k over $240k.
    88% of $325k is $286k - That is $94k more than the original loan of P1.

    For IP2, it involves a $240k loan now treated as $286k. That is $46k more than the original loan secured against P2.

    All up $140k "gearing up". Depending on your serviceability etc etc, to be used as a deposit for another property. All to be structured correctly.

    The $30k is sitting amongst this.

    The other $110k is capital growth:

    * Property 1 ($85k)
    * Property 2 ($25k).
     
    Last edited: 6th Apr, 2016
  8. Azazel

    Azazel Well-Known Member

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    Thanks for the replies guys.

    So if the the $30k is in with the other amount, is it correct to say you are paying interest on borrowing your own money?
     
  9. EN710

    EN710 Well-Known Member

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    My head is not working very well today.
    But, without the $30K deposit you have you would need to take $30K loan for the purchase. So no, I don't think you pay interest to borrow your own money.
     
  10. Azazel

    Azazel Well-Known Member

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    I am clearly not a numbers person. It hurts my head as well.

    Or use money you already had? At least you wouldn't pay interest on that.
     
  11. EN710

    EN710 Well-Known Member

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    When you buy an item
    Option 1: pay $30K $0 Loan - no interest paid, got not cash either
    Option 2: Borrow $30K, pay interest - you have $30K cash
     
  12. inertia

    inertia Well-Known Member

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    No, you are borrowing cash, secured against equity in properties you partially "own" (the bank owns the rest).

    Cheers,
    Inertia
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    In this case you would have 2 loans associated with this property
    Loan A $192,000 secured by this property, property 1.
    Loan B $48,000 secured by another property, property 2

    If you want to increase the total borrowings secured against property 1 there are some important tax issues to consider.
    1. Get a separate split or 2, and
    2. pay down the $48,000 loan - which will be a refinance.

    Ideally you would want all the debt associated with property 1 to be secured against property 1.

    See Tax Tip 36: Consolidating Loans for investment properties
     
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  14. Jason Tyrrell

    Jason Tyrrell Well-Known Member

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    No, you have paid $108k and are looking at re-structuring with only $78k down.
    So if you want to keep $108k down you won't be paying interest on the $30k. It stays the same.

    If you want to take the $30k out for a deposit elsewhere, you would. You are taking money back off the bank to purchase something, so would pay interest. The $108k is not your money now - you gave it to the vendor/s to purchase property. The remainder was borrowed from the lender/s to pay the vendor/s.
     
    Last edited: 6th Apr, 2016
  15. Azazel

    Azazel Well-Known Member

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    Yes - but... I gave $108k to the vendor/s to purchase property - with the help of a bank.
    Then a different lender gave me a new loan to pay out the original bank, which required me paying $78k.
    All additional funds were then in an offset account, which I pay interest on when I use it.
    This still, however normal it may appear, seems like paying interest on my own money to me.
     
  16. Rod.D

    Rod.D New Member

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    Ok it's 11pm so bear with me as I could be missing something but I think putting it down on paper (excel) might help visualise this:

    refinance-calculation.png

    Your capital gains were $110,000 but you will actually end up with $140,000 as available redraw (or in your offset account, wherever you or your bank decide to put it).
    So there is the $30,000 you were referring to and to me it looks like the answer is yes. You are basically using the $30k to secure the extra loan amount with cash (instead of property) and get a loan limit $30k higher but you then pay interest on this money when you use it. You're effectively borrowing $30k more than the increase in value of your properties.

    Why you would do this and pay LMI, I don't know but you probably have reasons to do so.

    Some businesses borrow money against their own money (loan secured by cash) and pay interest on it but for tax reasons that may be beneficial to them.

    I hope this helps.
     
    Last edited: 7th Apr, 2016
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    All the above replies sound so confusing to me.

    Rod.D's pic helps a lot (a pic is a thousand words) but you are combining purposes. It would help to have a second column for the deposit and the equity release
     
  18. Jason Tyrrell

    Jason Tyrrell Well-Known Member

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    But that is the thing...instead of the new lender wanting $108k to pay out the other (which is the lenders money now, not yours) they only wanted only $78k.

    So the $30k has to be borrowed. No other way. It is not your money now, it belongs to bank 1. Or more precisely, the vendor.

    If the new lender (with instructions from yourself) wanted $108k equity, nothing would change.
    They have loaned you $30k to make up the shortfall. Which was your choice. You want 88% LVR now, different to before.


    You can't "pay interest on your own money", when it is not your own money. You gave it to lender 1/previous owner of your properties as a deposit.
     
    Last edited: 7th Apr, 2016
  19. albanga

    albanga Well-Known Member

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    When simple subjects go bad. There could be a TV show for this.
     
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  20. Azazel

    Azazel Well-Known Member

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    "When otherwise intelligent people can't understand a simple concept... Brain Hurt! Starring Zach Galifinakis."