Join Australia's most dynamic and respected property investment community

Top up or application first?

Discussion in 'Property Finance' started by JetstreamVic, 30th Dec, 2015.

Tags:
  1. JetstreamVic

    JetstreamVic Active Member

    Joined:
    29th Dec, 2015
    Posts:
    29
    Location:
    Melbourne
    So as to not upset anyone, if you were going to use a top up on an existing loan to provide the 20% for the next property.

    Start the process for the new borrow first, and then approach the existing lender for the top up.

    Or...

    Get the top up arranged first, and then start the new process?

    Or, does it not really matter either way?

    N.B the loans are with two different institutions
     
  2. The Y-man

    The Y-man Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    902
    Location:
    Melbourne
    Get the top up done - otherwise where's the 20% for the next property going to come form even if you get the other 80%?

    The Y-man
     
  3. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    Top up first, but make sure you split the new funds into a separate loan rather than just making the existing loan bigger.
     
  4. JetstreamVic

    JetstreamVic Active Member

    Joined:
    29th Dec, 2015
    Posts:
    29
    Location:
    Melbourne
    Hey Jess,

    What is the reason for the seperate loan and will banks be willing to do that? If it was a seperate loan, where would they get their security if it was a sep loan?

    Does it matter for a buy and hold strategy?
     
  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    The reason is to do with tax deductions - keeps it nice and clear for the tax man, particularly if the original loan was for non-deductible purposes like your home, for example.

    It's still all secured by the one property.

    For eg - existing loan $250k, $50k top up brings loan to $300k, secured by Property 1 . This causes tax issues due to different loan purposes.

    The ideal structure is Loan 1 - $250k. Loan 2 - $50k for deposit, both secured by Property 1.

    The you get another loan for the rest of the purchase of Property 2, which will be secured by Property 2 only.
     
  6. Redom

    Redom Mortgage Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    863
    Location:
    Sydney (West) and Canberra
    Best to do the top up first (equity release). Then use it to pay the deposit for the new purchase. Terry wrote a great piece on where to place to the top up funds during the interim period to ensure tax deductibility.

    As to whether banks will allow splits - yes, but some do it at a charge. E.g. NAB broker have a $10 p/m fee per loan split, St George allow 5 splits under one package, etc. Some lenders offer more flexibility with unlimited splits than others.

    Noting the potential extra charge and Jess's comments on loan purpose, if the loans are always going to be investment purposes (i.e. you won't move into either homes, both investments are in woop whoop), there may be a tradeoff choice between keeping everything neat and attributable to individual property purchases and the potential extra charge for the split.

    If the loan purpose are different or may be different, the cost of the extra split is almost always worth it given you may 'contaminate' the loan and create a mixed purpose (private/investment loan). This makes it hard to claim deductions on any part of the loan and the accountant may not like it.

    Cheers,
    Redom
     
  7. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,150
    Location:
    Canberra and Sydney
    Top up first - you need to in order to demonstrate to the second lender that you have the funds to complete.

    Cheers

    Jamie
     
  8. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    1,165
    Location:
    Gold Coast
    further . .............. you may be served by doing a full refinance if you are with the "wrong" lender for a portfolio builder.

    ta

    rolf