Join Australia's most dynamic and respected property investment community

What should my ideal loan structure be ?

Discussion in 'Property Finance' started by Kuna_Learner, 21st Jul, 2016.

  1. Kuna_Learner

    Kuna_Learner Member

    Joined:
    1st Feb, 2016
    Posts:
    17
    Location:
    Perth
    Hello All,

    I am planning to get my first Investment Property and trying to understand how I should structure my loan to get it right the first time out. Intention is to get 3 properties by end of next year (Hopefully). My current Scenario

    PPOR Debt: 345k ( Market Value : 575k)
    Savings on Offset : 90k

    1st IP looking at Range (400-450k)

    Hence what should the ideal loan structure be in my case.

    Get 80 % next loan and 20% comes off the equity. (Including paying stamp duty etc etc). How is this set up for others ? If you could shed some light, much appreciated!

    Thanks
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,773
    Location:
    Perth WA
    Hi Kuna,

    You'd get a new loan split for approx $115k secured by your PPOR, and use that for your buying costs.

    If you need more than that, there's options for some clever use of your offset cash if necessary.

    The IP loan would be secured only by the IP, and can be with the same lender or someone different.
     
  3. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker

    Joined:
    18th Jun, 2015
    Posts:
    641
    Location:
    Sydney
    Jess has answered your question but even though you have 20% deposit for the next purchase do you think it may be better to do the loan at 88%, 90% or even 95% and have enough funds left over in the kitty for future investment use (whether that be another purchase, renovations, development, investment in shares, etc)?
     
    Jess Peletier likes this.
  4. Kuna_Learner

    Kuna_Learner Member

    Joined:
    1st Feb, 2016
    Posts:
    17
    Location:
    Perth
    Hi Jess,

    Thanks for the kind response. I would want to use as minimum cash as possible for the next two purchases. So hopefully I can use the loan split $115k to fund for two purchases. Is it better to get 90 % LVR in my case.

    Also is it ok to use the same lender for both my PPOR and future IP ?
     
  5. Brady

    Brady Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    461
    Location:
    Adelaide, SA
    Don't use you cash for any of the investment purchases!
    Need to work out how aggressive you want to go.

    $575k @ 90% = $517,500 - existing loan $345,000 gives you $172,500 available equity
    Divide that by 3 properties = $57,500 for deposits. Using that amount as deposit gets you around $380,000 purchase price
    Thats without using any of your own cash.
    If you're going to need more deposit likely best option would be to reduce your PPOR debt and get you more available equity (debt recycling)

    Best of luck, should be sitting down with your broker / banker and put together a plan of attack.
     
    House and Kuna_Learner like this.
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,773
    Location:
    Perth WA
    Yes, I would suggest using LMI and stretching that deposit as far as it can go.

    It's fine to use the same lender for a couple of purchases - it can be beneficial in regard to rate and also you can have them under one package which further reduces the cost.

    It will depend on what your servicing looks like as to which lenders get used at what point - you may find the first two propeties can go together at the same bank, but the third may (or may not) need a more generous lender. Your broker will be able to run the numbers on this for you. :)
     
    Kuna_Learner likes this.
  7. Kuna_Learner

    Kuna_Learner Member

    Joined:
    1st Feb, 2016
    Posts:
    17
    Location:
    Perth
    Hi Brady,

    Isn't equity calculated after 80% of $575k? Am I missng sth ? Idea is definitely to go touch aggressive. Once the loan structure strategy is done, I will have to start looking at type of house and area I want to target

    Thanks
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,374
    Location:
    Sydney
    90% in some occupations like accountants lawyers etc. Otherwise its usually 80%
     
    JacM likes this.
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,979
    Location:
    Sydney
    How is your serviceability?

    I think, if serviceability is good, you would set up a LOC on the PPOR to take the overall LVR up to 80% (value x 80% less existing loan = $115k.

    Then borrow the stamp duty and all other costs for the new purchase from the LOC and then get a separate loan for the remainder secured against the new property. This LVR should probably be as high as possible.

    Once you have settled convert the used portion of your LOC to an IO term loan. Keep the remainder as the new balance of the LOC.

    If you have enough for a second property repeat.

    By the time of the 3rd IP you would have run out of LOC.

    Then you have 3 choices
    1. Use the offset money to pay down the PPOR debt and then set up a new LOC.
    Best to probably only pay down the debt by the amount you want to borrow.
    2. If the property has increased you might be able to borrow further against it without paying down the LOC.
    3. Get a new LOC up to 90% of the PPOR value. LMI will be incurred and you will need tax advice on whether this will be deductible or not and if so against what.

    if you can squeeze more out then buy IP 4.

    By this time the earlier IPs may have increased in value so you might be able to increase the loans on this property and pay out the first loan which was the LOC - bring the borrowed money used for the deposit and stamp duty etc into the main loan for that property. keeps it all nicely together.

    You might have to modify you plan to suit, but you will either run out of deposits first or serviceability first and then will need to consider further to move forward.
     
  10. Brady

    Brady Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    461
    Location:
    Adelaide, SA
    Equity is the difference between value of the property/asset and debt/loan. Usable equity is from the maximum LVR be it 80%-95% (pending what you're comfortable with) less the existing debt. It all depends on how aggressive you want to be - you need to work this out. I've lost count the number of clients that initially wanted to borrow 80% because they didnt want to pay LMI, but then purchased a couple and regretted not stretching to 90% - brokers and other investors on here will likely back this up. It's easier to go harder earlier rather then later in most cases.

    Based on what you're looking at doing could do the $115k (80%) equity release - gives you $57,500 for 2 deposits on purchase prices ~$380,000 (@90%)
    Then if you wanted to purchase again later can either dump some cash from offset into PPOR (debt recycle) or borrow extra funds from PPOR (@90%+LMI)
     
  11. Kuna_Learner

    Kuna_Learner Member

    Joined:
    1st Feb, 2016
    Posts:
    17
    Location:
    Perth
    My serviceability is probably average I would say but if I take my partner's income may be combined serviceability might be better.
    Sorry Terry, I quite didn't get this part.

    Lets say I went for 420k property with 30k as stamp duty and other expenses. I pay this 30k plus out of the LOC ($115k) and get $420k as a loan against the new IP. I get this. When you say once settled, convert used portion (u mean the remaining $85k convert to IO loan or 30k to IO loan ? Correct me if I am wrong please! Will this 30k IO loan be different to the new Investment loan. Should I merge it ?

     
  12. Kuna_Learner

    Kuna_Learner Member

    Joined:
    1st Feb, 2016
    Posts:
    17
    Location:
    Perth
    Hi Brady,
    I am fine to pay LMI even if I know I can make 20 % for the 1st IP from my equity but I am looking long term as you rightly said about others regretting later.

    The other catch I have running in my head is my current PPOR is actually slghtly positively geared if I take into consideration rental income, depreciation (its less than a year old ). So my head tells me may be I should turn this into an IP next year. Obviously I will have to get another PPOR for me and my wife. So I am getting into complex territory it seems. But yeah up for learning definitely !!!!

    1st IP
    Convert current PPOR into 2nd IP
    Move to another PPOR.

    Not sure if this makes sense to you all or not:):)
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,979
    Location:
    Sydney
    If you set up a LOC for $115,000 and use $30k of it I suggest you then split the LOC into 2
    a) $85,000 LOC unused
    b) $30,000 LOC used

    b) should be converted into a IO term loan because
    1. Lower rate generally
    2. not at call

    The reason you don't start off with a IO loan is because of the risk of losing the deductibility of interest by parking money and shuffling it around.

    But if the IO loan can be used loan a LOC then you could start off - e.g. Westpac, Suncorp etc, but not NAB, not ANZ etc.

    Later when the new property increases you should merge the $30k loan into the large loan for that property.
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,979
    Location:
    Sydney
    If that is the case it would probably make more sense to stay in the property.
     
    Kuna_Learner likes this.
  15. Kuna_Learner

    Kuna_Learner Member

    Joined:
    1st Feb, 2016
    Posts:
    17
    Location:
    Perth
    Hi Terry,

    Why do you think I should stay with my current PPOR ?:)
    My thinkin is like this
    My current PPOR Debt ($345000 @4.1 % Variable Interest )- Monthly repayments: approx$1700 .If I convert this to IP, I will get around ($ 480 per week). If we add in depreciation etc, it should be neutrally geared, right ? I will let this loan be P & I loan , not an IO loan. All I am thinking is I dont need to pay anything out of my pocket for this home, (Principal will be taken care of as well) and I can focus on expanding my portfolio elsewhere. Does this sound very naive and stupid ? :rolleyes:
     
  16. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,773
    Location:
    Perth WA
    You probably wouldn't pay P&I on an IP, as the principle payments are better off being directed into your new PPOR and leaving the IP on interest only until you no longer have non-deductible debt to repay.
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,979
    Location:
    Sydney
    But where would you live?
    If it was negative geared and saving you tax there may be some point.

    but if positive then you would be paying extra tax on the income while having a large non deducitble loan on the new property.
     
  18. Sonamic

    Sonamic Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    949
    Location:
    Sunny QLD
    Rentvest.
     
    Jess Peletier likes this.