Shooting yourself in the foot with a locked in period

Hi all

Thought i was very clever recently and was riding high watching values on both my ips going up quickly. With this in mind i started prepping for pulling equity ready to go again etc. One of these moves was to phone the lender of my UK mortgage to see where they thought the value sat. To my delight it was slightly more than I'd estimated they'd say and they were happy with the desktop analysis for a valuation. All great so far. The following night because of time differences I called back to see if my serviceability satisfied them to allow me to pull the equity ready to go again and they said that they no longer lend to Australian residents and because I tied up my mortgage with them on a great rate of 2.78% for 5 years (because the set up costs etc were better than the 3 year and 1 year deal) I would have to pay £6550 ( $10480 ) to be released from the mortgage. Crap!!!!!

I have a valuation of £204k and an outstanding mortgage of £133950. If they hadn't changed their policies I would have been able to pull out 75% of the value. There are no lenders mortgage fees in the UK so apart from a few low admin fees I estimated I'd walk away with £19500. With an exchange rate of £1 = $1.6 AUD I was anticipating having a nice bundle of cash to make a move with. NOPE!

I've explored a few other avenues over there but in short unless i want to forego $10k in fees to pull out of the deal then take more fees to set up with another lender then there is little i can do but watch the LVR just get better and better. The house was valued by the lender at £185k this time last year so I calculate it's risen by about 10% in a year so that's great but not so much if you can't use that money which brings me on to my point and question.

My Australian ip has also done well in its short life span. Bought in March for around the $280k mark and was mortgaged at about 90% LVR. I think that property is now valued about $300k or maybe $305 at a push so good growth there too.

I was happy to just leave this sit and do nothing based on the expectation of being able to pull the UK equity but now, the only way i can realistically go again would be to go up to 95% LVR on the Australian ip. The total portfolio LVR would still look good and I'm reasonably comfortable doing it but would this screw me up down the line?

I'm under the impression that if you want to build a large portfolio then you should keep your LVRs be at around 80% or you'll hit the servicability wall. Is that an average across the portfolio or do they expect each property to be at that level?

A long post but I would appreciate some feedback on this one.

Take care all,

Paul

 

Hey Paul,

My estimate has about 33k in your Aus IP which throw in some fees and a large LMI top-up I would say no way.

Remember property investing is a marathon not a sprint. Why go throw away money on unnecessary fees when clearly you are well positioned. Both properties are performing well and if you just sit on the sidelines for a couple of more years you will be ready to go BANG!

But if you insist, is there another way you can manufacture some gains? Perhaps a renovation in your IP or PPOR if you have one?

 

What's the rush?

 

Your absolutely right and pretty bang on with your figures too. I called the lender yesterday just to see what they thought about the number on the Australian ip. They told me to push up to 95% LVR would cost me around $5400 in fees and would allow me to walk away with $32200. That amount would allow me into another property at 90% LVR at about the $220k budget I think but do I need to do this today at the cost of $5400? They ran the figures staying at 90% LVR and that will cost me a lot less at $2000 but only give me $20k to play with.

As per above, thats a great question. In short, if I could have used the UK equity release at no real cost of redraw then it would be worth doing and that is what had whet my appetite to the point to even consider this second route after I was told no by the UK lender. The answer is, there is no rush. No need to pay that fee just to buy again. A fast rising market could cover that cost quickly but I am not confident enough to say I could achieve the same figures again as I had seen in the last 6 months?

I would save LMI charges as you said by letting the ip continue to rise. If it goes to $320k and I go to 90% at that point I will have $36000 to cover the costs of LMI and also, presumably the LMI would be much less on that %age too. If it gets to $350k I could almost achieve pulling $30k out of it and leave it at 80% which would attract no LMI at all.

Thanks for your feedback guys, very much appreciated. Good replies.

 

LMI is depreciable over 5 years and any interest paid on it is tax deductible. Something to ponder but only if the opportunity cost outweighs extra fee?

If you stay with the same lender you will get a credit for previous LMI paid so will just be a top up to last LMI premium.

LMI is just a leveraging tool and is neither good nor bad on face value.

 

I have not carried out that kind of study yet. I am early into this consideration. 5% growth on a $220k property is $11k in a year so minus the LMI at $5400 ( assuming the price they gave me had already taken into account my credit for previous LMI ) still $5600 up in one year. Rough calculations of course. Other things to consider.

Picks up the phone to see if they had credited from previous LMI in their quotes.. Good point, thank you.

 

Bear in mind that over 90% at CBA affects servicing in that you can't use negative gearing - this has a large effect on servicing and it's highly unlikely theyll allow cash out up to 95% anyways.

 

[QUOTE=" they said that they no longer lend to Australian residents and because I tied up my mortgage with them on a great rate of 2.78% for 5 years (because the set up costs etc were better than the 3 year and 1 year deal) I would have to pay £6550 ( $10480 ) to be released from the mortgage. Crap!!!!!
[/QUOTE]

Are you currently non UK-resident and the lender is a UK lender? I ask because I didn't think UK lenders allowed non-residents to take out equity - that's what Natwest said to me anyway.

 

Hi Jess,

I think at over 90% we would still be close to positive cashflow. My first thoughts are that with those fees it would be smarter to leave until the Australian ip has reached a level where the costs of going back up to 90% would not be huge. Spend that waiting time reducing debt and increasing serviceability that way. If I could have pulled a deposit from the UK I would have definitely done that since I think I could have bought something with that equity alone. Pulling from the Australian one at this time does feel like rushing.

We will be in a far stronger position in 6 months with the last of our loans and credit cards cleared up. By then we could just about afford to have a property vacant without killing us quickly.

Are you currently non UK-resident and the lender is a UK lender? I ask because I didn't think UK lenders allowed non-residents to take out equity - that's what Natwest said to me anyway.[/QUOTE]

Hi Zlatan9

That isn't entirely true across the board. I am a UK expat Australian resident. I am also with Natwest funnily enough and they only changed their policy in May due to an EU directive. I am quoting my uk mortgage broker on this so I know little more than that as I don't need to since I am tied in for another 4 years on that rate. If they change their policy again I would be able to go back up to the 75% LVR that I used to be able to go to.

I remortgaged over to them last Oct roughly as I used to be with the Ipswich Building Society but they would not increase lending and their rates were not favourable either. My uk broker tells me that I could switch off of the current lender to others who will offer 70% LVR but the conditions would not be as good. The point is though that there are still uk lenders who are happy to lend to non uk residents so you are not completely without options.

With the exchange rate being the way it is today and the rising uk market I think it would be foolish to sell your uk asset but that is one way of getting your hands on your full potential.

If you want the details of my UK broker to have a chat with him just PM me or reply here and I'll put you in touch.

Best of luck.

Paul