Buy now or Wait?

Hi,
I'd like to get your opinion on our situation.

We spoke to our bank yesterday about financing our first IP and they said we could easily service an IP loan for $330k, but due to our lack of equity (only bought our PPoR 11months ago with no deposit) they can only lend us $190k.

My question is... is it better to buy a cheaper IP now, or wait another 12months to build up enough equity to purchase a more expensive IP (around the $250k mark)?

Your opinions and suggestions are appreciated.

thanks
Amber

 

Yes, I think its best to buy now/soon and hold.

Yes, most are currently leased with tenants willing to sign another lease, the ones I've been looking at have quite good rental returns as well.

The difference is the location. $250k property would be closer to my home (know the area better) but the returns are not as good. The $190k properties are further away, but returning quite good rentals and have more opportunities for property price increases.

Thanks Sim, by answering your questions, I guess I have my answer .

 

Amber

Considering that you have a PPOR loan, think of your exposure to interest rates rises. Also, is your income secure?

Good luck

 

Hi Bill,
Thanks for replying.

We are (and have since settlement) making repayments as if the interest rate was at 10%. We thought since we could afford it, if we made the extra repayments from the beginning, not only would we be able to pay off our PPoR early, but we wouldn't have to worry too much about the rises (unless they go higher than 10%)

Yes, we both have secure jobs, and I have recently been given a payrise and bonus, so that isn't really an issue for us at the moment.

Taking this into consideration, anyone have any other comments?

 

Amber,
It sounds from your first post that you are using the same lender and they will cross guarantee your PPOR to the new IP to lend you the additional $190k. That presume you do not have a separate deposit or LOC established to fund the settlement of an IP.

This is a case of instead of putting your funds into your PPOR loan to pay it down (admirable but not necessarily the best strategy to acquire a property portfolio) you need to be putting your additional funds into a separate offset account as well as switching your PPOR loan to a 5 year interest only yet still pay the differential into the offset, building the offset quicker.

You need to build your offset account to a stage where you can either refinance your PPOR and establish a separate LOC or use the offset funds as the deposit for the IP with another lender who will go to a 90% or higher LVR.

As to which is a better strategy for you in terms of capital growth or rental income bias, it sounds the former. You said your income can service higher than your equity, so you need to build your equity base at this stage in your investing life-cycle.
I hope this helps.
Greg

 

amber
have you bought anything yet?

 

Hi All,
First i'd like to say thanks for all the great advice.

We haven't bought an IP yet, something (unrelated to finance) came up and we've had to push our plans back by a few months, which isn't really a bad thing as we'll have more time to increase our equity.

We're looking at changing our PPOR loan structure to be IO with a 100% offset account (still need to work out exactly what $$ impact that will have), and using the offset to fund our IP without cross-collaterisation.

We spoke to our mortgage manager and they'll do the IP loan at 90% LVR (with LMI) without using our PPOR as collateral, but when we get closer to actually purchasing we'll look at other lenders.

The only thing i'm worried about now is the cost of converting our PPOR loan over. We're with CBA and currently have a 3yr econimiser HL which gives us a reduced interest rate for the first 3yrs (only 12months in atm) but we are unable to get an offset a/c.

So all in all, we know where we're headed, but we need to get our financing right first.

Thanks again everyone