Browse Forums Home Finance 1 Oct 08, 2013 11:36 pm Here's my predicament... My partner and I owned an investment property outright before we bought our first home, and that investment property (an apartment, valued about $350) formed part of the security for the mortgage we ultimately took out to buy our house. Thanks to the apartment we were able to borrow more than the cost of the house (purchase price was $410, we borrowed $465.) The bank was happy to lend us a fair bit more - our broker asked if we could go up to $520, and that was fine - but in the end we low-balled because we didn't want to owe so much more than the house was worth. Well, that was less than six months ago, and we're already regretting it. In that time, house prices across Sydney have risen slightly, comparably-sized properties in our area have gone for $600, and we have begun substantial renovations to take the house from "unliveable" to "comfortable" (brand new kitchen, bathroom, laundry, asbestos removal, and new floors and skirting boards throughout - whereas before we came along it was mostly original condition, partial renovation from the 1970s, missing floor in one room, overwhelming stench, filthy smoke-affected ceilings and walls, animal faeces wedged under the skirting boards - it was pretty foul). In short, I think we've already raised the value of the house considerably. But the renos are costing more than we expected (of course!) and there are a number of additional home improvements we'd like to undertake that we don't have the cash for (front and back deck, restore the fireplace, new windows and front door, and painting inside and out). I think we'll need another $35k to make that happen. What's the best way of trying to get the money together? How likely is it that the bank would be willing to extend our loan so soon? Should we get a valuer through first to prove to our bank the house is now worth more than the $410 we paid earlier this year? If end comes to end we can skip the loan and save up the money ourselves but I really don't want to spend the next year with unpainted walls. Any suggestions? Re: Our mortgage is brand new - and we should've asked for m 2Oct 09, 2013 7:11 am Banks are happy to lend you more money so long as the sums add up. If you have the security and are able to service the loan it won't be an issue regardless of whether it's been 6 weeks or 6 months. Brokers normally get a commission on settlement and then a trailing commission for as long as you stick with a loan but if the loan is held for less than 12months they may lose some of that initial commission. So if your broker looked after you get back in contact with them, they'll be able to help you and still get their due. http://camdenbuild.blogspot.com.au/ by invite only please pm me Re: Our mortgage is brand new - and we should've asked for m 3Oct 09, 2013 9:24 am Thanks for the reply. Yeah my gut feeling is that the bank will want to give us as much money as they sensibly can so they can make more from us. I just get nervous about making any application that's likely to get knocked back - I don't want a failed application on our credit file. Re: Our mortgage is brand new - and we should've asked for m 4Oct 09, 2013 9:30 am Oh and I should have said - it's a split fixed/variable loan. As I understand it we can't change the fixed part without incurring a hefty break fee but the variable bit is only $80k of the total amount borrowed - so I don't know if that makes a difference Re: Our mortgage is brand new - and we should've asked for m 5Oct 09, 2013 11:52 am Being so soon after the initial purchase the bank might not like to revalue the property but as you have had major renovations performed, you have a very good reason for wanting it done so need to force that point home upon them. From your initial post, it seems that your broker has cross collaterised your properties which is a no-no in my book, so it would mean a tad more work but even so, if the original values of the IP apartment and recent purchase stand up, then from my calculations you still have over $100K in equity before you hit the 80% LVR mark. As long as you able to service the increase and the lenders cash out policy allows it, then it should be okay. Obviously the fixed part of the loan can't (shouldn't) be touched, but you can either increase the variable component or take out a separate split in itself. Cheers Tom Re: Our mortgage is brand new - and we should've asked for m 6Oct 09, 2013 3:33 pm Thanks Tom. Reassuring to think we have a good shot at a top-up. Just curious, why do you consider cross-collateralising a no-no? We didn't want to pay lender's insurance but we didn't want to wait while we saved a bigger deposit so when the broker suggested we take this route it seemed reasonable to us... Re: Our mortgage is brand new - and we should've asked for m 7Oct 09, 2013 3:48 pm Hmmm I think it may also be not tax efficient to pay off your investment property and borrow for the house you live in. Not my area of expertise but for investment properties may want to go interest only and use a mortgage offset account if possible. It should achieve the same payoff profile as paying P + I but preserve the debt and interest charges. Then when you purchase your principal residence you can access the cash in the offsetting account as your deposit. Maybe next time. Current situation should allow for additional borrowing as long as you can demonstrate serviceability and you have collateral cover. Banks like you to service as that's where we make money. The collateral is the banks way out when things go pear shaped. I don't really understand the cross collateral comment. Unless its with different banks as they would discount the worth. I look at collateral as a pool of security that gets you the funding and agree I would not want mortgage insurance if I can avoid it as the cost can go towards the debt. I think serviceability is what needs to be assessed and what sort of buffer you want to build in for the periods that stress cash flow. Rant over, borrow more... Cheers Mark Re: Our mortgage is brand new - and we should've asked for m 8Oct 09, 2013 6:34 pm OK with the amount you wanted to borrow you couldn't do anything about the cross coll but if you keep both properties definately work to uncross them if you plan to have a property portfolio of more than 1 investment property. It will slow you down. Also bad choice with paying down the investment property. Definately do some research into the best way to set up loans if you intend on buying more investment properties. At the moment you have no deductable debt. I'm not a mortgage broker (but have lots of experience with loans) but seeing they offered you the larger amount I'd say you won't have a problem topping up the loan if it's under 80% of the value of both properties. If not a reval will get you there. Mark it seems you don't undrrstand cross collaterising. Maybe do some research. It's an importantr concept to get right if you are investing in property. Re: Our mortgage is brand new - and we should've asked for m 9Oct 09, 2013 6:57 pm Travelbug, I understand the perception of issues that cross collateral may pose however these can often be overcome. In a perfect world each loan would have its collateral unique to the loan however this is not always possible. I guess the issue can get magnified when moving assets around as banks may try and dictate what you do to their advantage. I must admit that I have not actually thought about it for my portfolio as my ltv is low. However I am refinancing and it is food for thought as to how I post my collateral. I may pm you if you don't mind. Cheers Mark Re: Our mortgage is brand new - and we should've asked for m 10Oct 10, 2013 12:21 am WesternFront Thanks Tom. Reassuring to think we have a good shot at a top-up. Just curious, why do you consider cross-collateralising a no-no? We didn't want to pay lender's insurance but we didn't want to wait while we saved a bigger deposit so when the broker suggested we take this route it seemed reasonable to us... Totally understand that you didn't want to pay LMI, however you also need to realise that any deal that prevents LMI by cross collaterising can also be done by having individual loans against individual properties. It's a common misconception and any broker that doesn't at least offer it to a client as an option is lazy (just because it involves two applications doesn't mean they ignore it) or they are limited in their knowledge. Taking your example this is how it could have been done: Loan application 1 against IP (value $350K): Loan amount: $137K as equity release for 20% deposit and reno costs for PPOR. LVR is 39%. Loan application 2 against PPOR (value $410K): Loan amount: $328K. LVR is 80%. You still get your $465K to spend however it is spread over two loans and each against one property only, you don't pay LMI and it's not cross-collaterised. Also would be easy to now ask for a further equity release against your IP. Many advantages of not crossing. Some are: 1. In a crossed situation when asking for an equity release they will be valuing both properties so you would hope that one hasn't dropped in value limiting your chances. 2. If you sell one property in a crossed situation because you need funds, the bank might say sorry we're using all the funds from the sale to pay down the loan and not give you any as the remaining property LVR is too high for our liking. 3. If something goes wrong and you can't afford to pay the repayments back, the bank chooses which property to sell so it might be your PPOR instead of your investment. 4. If you have investments mixed with a PPOR, with crossed properties you don't maximise your deductibility. Basically not crossing gives you more control than the bank, so it's much more beneficial to the borrower. Cheers Tom Re: Our mortgage is brand new - and we should've asked for m 11Oct 10, 2013 12:38 am Tom, +1 on your answer. It sets out and clarifies the issue nicely. It has certainly made me think about how I restructure my finances. I do not think the interest on the loan would be deductible in the above scenario as the purpose of the borrowing is not incurred in earning income. My issue is that I have a couple of loans with assets held in a pool to cover the borrowing. My LTV is very low however as I want to borrow more to invest it makes sense what you say so that you can control which assets go where. I think that releasing equity from value in PPOR should probably be done via a separate loan as I could see it getting messy with apportionments etc. I appreciate your post as I am sure the OP does as well. Cheers Mark Re: Our mortgage is brand new - and we should've asked for m 12Oct 10, 2013 1:43 am AussieMark Tom, +1 on your answer. It sets out and clarifies the issue nicely. It has certainly made me think about how I restructure my finances. I do not think the interest on the loan would be deductible in the above scenario as the purpose of the borrowing is not incurred in earning income. My issue is that I have a couple of loans with assets held in a pool to cover the borrowing. My LTV is very low however as I want to borrow more to invest it makes sense what you say so that you can control which assets go where. I think that releasing equity from value in PPOR should probably be done via a separate loan as I could see it getting messy with apportionments etc. I appreciate your post as I am sure the OP does as well. Cheers Mark You're correct on that. As the funds are completely for the new PPOR, there won't be any tax deductibility for this particular scenario, unless the OP decides to move out and make it an IP later on. I just thought it important to let people know that there normally is a way against crossing, and my biggest gripe is reserved for those brokers and bankers who take the easy route and cross without thinking that it probably isn't in the clients best interest. It's stuff like this that separates good brokers from the bad. Cheers Tom Re: Our mortgage is brand new - and we should've asked for m 13Oct 10, 2013 4:42 pm I refinanced several of my IP's a few years ago. When the paperwork arrived they had crossed them all. They had all properties listed on all the loans./ I said no that's not correct. I had specified I wanted stand alone loans. The broker ASSURED me they weren't crossed. Crikey it was written on the documents. So I sent her away to rewrite them. I got a LOC on my PPOR to use as deposits and legals for new purchases. That way I could just get 80% loans without incurring LMI. And that way you can borrow 105% of the purchase price (all deductable). Having a healthy LVR helps. Re: Our mortgage is brand new - and we should've asked for m 14Dec 02, 2013 8:49 am A quick update just in case anyone in the same predicament reads through this thread later - we approached the bank again (via our mortgage broker) and they were more than happy to give us the extra dosh we needed. (In fact we ended up getting a little bit more than we originally wanted, because we figured if we didn't end up needing it, we could sink it back into our variable loan.) The bank didn't want to see the property again, nor were they interested in seeing quotes or contracts from our tradies as evidence that we were indeed putting the extra money towards improving the house. All they wanted to see were fresh payslips, which makes me think that all the bank cared about in our case was serviceability. The entire process - from when we first approached our broker to when the money showed up in our account - took one month, down to the day. Hope this will be of use to someone else in future! (PS: As for all the comments about the whole cross-collateral side of things - I think you've convinced me it wasn't the best way to go. Having said that, we have no need to free up capital now and it's not on the cards for the next few years, and we're so consumed right now with the stress of renovations that I'm happy to leave it be. Once we've fixed our house up and moved in, I'll reconsider our position.) 9 24815 I am in a difficult situation. Long story short I have been handed over my brand new home in Sydney with everything in the house being great except the windows that were… 0 965 Thank you. That is really helpful. Once we get the place done and passed for OC we can upgrade in the future once we get back on our feet and not paying mortgage and rent. 4 5745 |