Using equity first or Savings.

Hi team just wondering what are the pro’s and con’s on using equity first before savings or vice versa. Currently have 250k in an offset reducing my loan repayments. But now in the process of releasing the equity I have in another property in order to fund next purchases. Is there a strategy seasoned investors use. My concern is the amount of time it will take to A. Equity release and B. Applying for new loan & have itchy fingers atm. Would it be best to apply for new loan of the back and have equity release running at the same time ?

 

think tax issues, estate planning and future ability to borrow. If you borrow now you can offset the debt with the offset so it is really not costing you must at all. You can also pay off the loan at any stage

 

Ok then so would you say release the equity first then utilise my funds later. I was thinking even if I do use my own funds I can always release the equity and replace those savings.

 

You're assuming that you'll always be able to access the equity in your property, serviceability can and does change quickly which could change that.

If you use equity loan towards an investment property it should be tax deductible debt, (ideally create a separate loan split for the new borrowings) if you use it to replace your savings it won't be so you need to consider the tax implications of each option. I'm not a tax adviser so you should seek your own specific advice.

Use the equity first and keep the savings for later, that's what all of my investors clients do.
Use a broker who can assist you with managing the timing of the equity release and loan for the new purchase.

 

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Ok then thanks for that, I my broker is working on the equity release now. She said that we'd have to do the equity release first then the new loan application so we know what our serviceability would be ? But are you saying it is possible to get the loan application stared now/ at the same time ?

 

Absolutely possible

If you know the amount of the equity loan being applied for then you can simply factor that in to the new loan serviceability calc, it's pretty simple.
Timing on the new purchase just needs to be managed properly.

 

Your savings are your buffer for bad times. Don't use it unless you have to.

 

You wont always be able to release equity and if you can it can take months. It has become increasingly difficult to get an LOC over the last 20 years to now being impossible , once you could just ring your bank manager and ask for more money even on the weekend and have funding in minutes. Not having funds available when borrowing is difficult means the best wealth building opportunities are forgone . You need to be able to buy when other people cant, and when the opportunity presents or buy quickly to get the property off the market or just to get a discount for unconditional purchase.

 

The real answer to this question is that it depends on your circumstances and how much serviceability you have.

Ideally you'd always borrow against equity for deposits on IPs, reserving your savings for paying off non-deductible debt and risk management.

Practically people don't have unlimited serviceability, so borrowing against equity may not always be feasible or optimal. If you don't have the capacity to borrow against equity, then debt recycle the savings you'll use (if you have non-deductible debt), then use it as the deposit.

The key is understanding how far your existing resource can take you in terms of deposits and borrowing power across different lenders. You need to keep context of how far you want to go, what is realistic in the market and what your own risk tollerances are.

It's a little different for everyone and can be a little complicated. A good broker should be able to figure it out for you if they understance the nuances of optimising serviceability and loan structuring for investment portfolios.

If you can, use the equity for now and reserve the savings for when you'll need it.

 

A decent broker can map out how much equity you can access and how many properties you can potentially purchase with it before you need to start using your savings

 

Yea that's what my thought was & I guess having the savings boosts serviceability for future purchases. In saying that, there will get to a point where the equity will dry up for a while and I'd like to utilise the savings funds for deposits. My plan for 2022 is to buy 4 properties if the banks allow. Most likely use 120k Equity (estimate) to purchase 2 properties in Q1 & Q2 this year and then 120k of savings in offset account for 2 more properties in Q3 & Q4. Leaving me with around 130k in an the offset that I won touch. Then hopefully in 2023 there will be some more equity to tap into, as I do my loans at 80% LVR.

 

Savings doesn't boost serviceability, it's not income and therefore not taken into account when doing serviceability calculations.

 

You can dip into your savings to make up deposit shortfall but use the least amount required. Keep it for when interest rates go up, if you're between jobs or tenants. Also look into paying only 12% to 15% deposit - LMI would be small but worth keeping the extra cash in your pocket which you can then use towards your next deposit.

Obviously do your budgets and cash flow statement before deciding this and also stress test your plan at 5 and 6% interest and principal.

 

what about the tax issues with that and the potential of not being able to borrow in the future

 

Yea in think I have answered my own question, take the equity while it’s there and have the new loan running separately