Browse Forums Home Finance 1 Jan 04, 2011 2:34 pm I am looking to buy an IP, is it a good idea to use my fully owned PPOP as collateral for the loan? What is the best way to do it? Thanks! Re: use existing property as collateral 2Jan 04, 2011 7:58 pm Congratulations on owning your home! That is a massive achievement. I would take out a loan against your home for 20% of the purchase price of the investment property. Then I would obtain a separate loan for 80% of the purchase price. I would go with 2 different lenders but it is not essential. The 20% loan is secured against your home but the other 80% remains completely separate. If you go into a bank, they will usually recommend that you just get one loan, but what you are doing is using your home as security for the new property. By having 2 separate loans, only 20% of the funds of the new property are secured against your home, rather than your home itself being the security the bank holds against the investment property. As the 20% secured against your home is to be used for investment purposes, it is fully tax deductible. While the above is more fiddly and time consuming than cross-securitising the properties in one loan, it means you have full control of each property separately. So if you want to sell one in the future or refinance it, you can do so completely independent of the other property. I do this for all of my investment properties, using equity in my home for the deposit funds but obtaining a separate loan for the remainder of the purchase price. Land at Chermside At tender stage Re: use existing property as collateral 3Jan 04, 2011 8:36 pm We had a thread about this recently. This is what we did (although some posters thought it wasnt good idea, still not really sure why ) We had a PPOR house, almost paid for. Loan had redraw facility. PPOR was worth double the investment unit. We just redrew on PPOR loan to fund IP - obviously with same lender. Same interest rate and one $15 redraw fee instead of several hundred $$ loan application fee. Yes, I realise this means the IP is actually not mortaged as such, therefore if anything happens, it is PPOR which will default - however, we obviously had insurance on both places and risk seemed extremly minimal. Interest on portion of loan which was for IP was still tax deductible - tax agent worked this out for us each year, had no problems with that or with ATO (as some posters expected in previous thread) Did this for 6 years until we sold IP. We sold it aprox 18 months before selling PPOR (to fund new build) and had no problems with finances of doing that whatsoever. Re: use existing property as collateral 4Jan 05, 2011 7:36 am Thanks very much for the quick replies... let's say I finance my IP with 20% (secured loan from my Fully own property) and 80% (Normal mortgage) I guess my question is...in terms of interest expenses, is there any difference between secured loan(that 20%) and the normal mortgage (80%)? What is the benefit of financing it in this way? Thank you! Re: use existing property as collateral 5Jan 05, 2011 8:42 am It doesn't make any difference how much money is secured against each property in terms of how much interest can be claimed as a tax deduction. Your accountant take into account any interest costs incurred by you to purchase an IP regardless of whether it is secured against the IP or your own home. The benefits outlined by zozo are that you can still claim 100% of your costs (interest) but do not offer up your own home as security. If the same lender has both the loans on the investment and your own home they throw in an all properties clause which means they can sell all your houses to recoup losses if you default. Hence the suggestion you use two different lenders. Building an Eden Brae Saville 27 http://karry327.blogspot.com/ Building thread https://forum.homeone.com.au/viewtopic.php?f=31&t=44247 Re: use existing property as collateral 6Jan 05, 2011 9:31 am Thanks. Understood. An unrelated question...I knew some people have multiple properties and their income is not that high. I am curious to know how those people about to afford multiple properties... I just don't understand how the rent is able to cover the interest bill...even it is tax deductible...it is still very difficult to understand why not just put in a bank earning 6- 7% interest... Re: use existing property as collateral 7Jan 05, 2011 10:07 pm They can keep buying properties if the rental covers or comes close to covering the mortgage. For the majority of lenders, 80% of the potential rental income is used as part of your income for the purposes of assessing borrowing capacity. So if the investor continues to purchase properties where the numbers stack up, they can keep borrowing. I have a couple of rural properties where the rent well exceeds the mortgage. As for why you wouldn't just put money into a savings account? If you have 20K and you are putting it in a bank account at 7%, you get $1400 per year. If you use that 20K to purchase a 200K property and that property increases in value by 7% per year, then your wealth increases by $14000 per year. If you hold a few of these properties for 7-10 years and then sell them, you'd have much more money in your hand than you would if you put cash in a savings account. Land at Chermside At tender stage Re: use existing property as collateral 8Jan 08, 2011 8:11 am Investment loans are mostly Interest Only (no principle) so repayments are less than that on your own home. So rent plus depreciation goes a long way to covering costs. Most investors plan for the rent and depreciation to cover costs for a long period in the hopes of realising a big Capital Gain (CG). This option allows all the money to borrowed from the bank, the interest expenses to be met by rent, etc. So if a CG is made there was minimal/no own funds put in in the first place. This is why so many people buy investment properties - it is not about earning interest on some savings, it is about realising the equity in your own property and leveraging (using bank funds) to hopefully make a good CG in the long term. Hope that helps - it is an involved process, best to talk to your accountant (beware Finacial Advisors they get commissions if you but your money in Managed Funds so may not even consider private rental investment). Building an Eden Brae Saville 27 http://karry327.blogspot.com/ Building thread https://forum.homeone.com.au/viewtopic.php?f=31&t=44247 Re: use existing property as collateral 9Jan 08, 2011 7:47 pm Given Australian housing prices are some of the highest in the world, leveraging on investment properties is not what I would call a good investment decision. But of course, the bubble may inflate further before bursting. As to the separate loan issue, even if you have the separate loans, if there is a shortfall on the loan when the IP property is sold, the bank will come after you for repayment including selling your PPOR if necessary to full recoup their funds. 4 11184 1 19709 You might be able to apply to divert the sewer at your expense. In NSW you would contact a Water services co-ordinator and they would give you advice as to whether or not… 1 16130 |