When do you get your equity back?

Hi all... Possibly a dumb question but here goes...

EG. I have PPOR valued 285k owe 200k. Use $20k equity as a deposit for IP.
IP has been purchased for 160k valued at 240k.

Loan structered as PPOR $200k and IP $160k. So no Seperate loan for deposit.
Because the IP has significantly increased in equity, does the PPOR have its full equity back?

Any insight to this would be helpful
Thank you!!

 

How did you pay the deposit on the IP? It sounds like you might have a crossed loan that has also been contaminated with mixed purpose. Hopefully I am mistaken but if so that's quite a mess.

 

You dont borrow equity but money. Tuink along these lines and it may be clearer

 

Deposit bond (as per the banks recommendations). Yep pretty sure they are cross collateralized... Currently working with a broker to fix this issue.

 

Thanks Terry, yes it does make sense, if I'm understanding right, so the bank sees there is equity which reduces their risk so they are happy to lend the extra?

 

If your house is worth $285k and your loan against it is $200k, you have $85k equity.

You go to the bank again and borrow another $20k against the equity. This increases your loan to $220k, and decreases your equity to $65k. Does this make sense?

PS In the above example I use a single loan, but in real life you'd be best splitting off the second $20k amount as a completely separate loan, as others have mentioned above. This was just for simplicity.

Edited to fix typos and to add: the only ways to "get your equity back" (ie for it to return to $85k) is for:
- you to repay the $20k, decreasing the toal loaned against the property and therefore increasing the equity, or
- have the market lift and now your house is worth $305k, so even though you still owe $220, the equity is back to $85k.

 

To add to this, the bank wants to maintain 10% or 20% equity in the property.

 

Based on this, you have $28k useable equity in your PPOR, and $32k in your IP, keeping your LVR's @ 80% to avoid paying any LMI.

You have been x-colled (can't get a 100% loan without it), so once the loans are uncrossed you'll have 4 loans - 2 to replace the original loans, and another two for the equity in each property.

 

Well the thing is my loan didn't increase to say the $220. It stayed exactly the same (200k) and the IP loan is the full amount of the purchase price of the IP (160k for example).

 

ah yes I just realised you mentioned deposit bond above - sorry, missed that before.

I've no experience with them so I'll let others explain!

/useless contribution

 

That's because of the x-coll. If they weren't x-coll, the loan on your PPOR would be $20k bigger, and the IP loan would be $20k smaller.

 

So that wouldn't work well for tax purposes but would it? Which is why you would opt to get another loan instead of adding it to PPOR?
Thanks Jess

 

You'd create a new loan split for the $20k rather than just making the PPOR loan bigger, so it would be easy for your accountant to work out deductions and no mixing of deductible and non-deductible purposes.

 

Use determines deductibility not security for the loan.

Tax Tip 22: Security for a loan does not determine Deductibility of Interest

 

Thanks for that! I'm learning so much from this forum!

 

Hi all,

I've let this thread sit for a few days so I didnt hijack the conversation, but in a similar vein what about the following scenario?

If for example,
IP cost $300000
Loan against IP =$248000
Separate loan against PPOR = $75000 for 20% deposit plus costs.

If over time the IP increases to, say $420000, could you then combine the 248k and 75k loan to make a $323k loan against the IP. (76% LVR). Or does this have tax implications???

The benefit of this would be to free up equity or pay down the dept on the PPOR, (and make your loan statements shorter .)

Thoughts??