Loan recommendations?

I noticed that their LOC loan which is what started this thread is no longer at a rate of 7.14%, but much higher (more than the 25bp interest rate rise)

 

No, not concerned, and only that one manager can provide the quarterly income (even if its at the expense of capitol sometimes)

I dont percieve any management risk. That said I will be putting smaller amounts in CFS142 Australian Geared fund for a bit of growth

The alternative would be investing in other funds and manually withdrawing the amounts required either monthly or quarterly.

I've decided to use a 6 month buffer that the interest and rental shortfall will be taken from, so should be able to weather the quarterly distributions ok.

 

Shop around (and feel free to ask the mortgage brokers that frequent this site which products are flexible and well priced)

 

Simon I am interested in becoming a mortgage broker here in WA i am considering learning the training and trade form Aussie Home Loans. Can you give me any advice on how you would go if no pay for 6 months?

Did you have any fears or doubts?

 

Triu, just allocate yourself 6-months worth of living expenses then say to yourself that you've paid yourself for 6 months in advance so no need to stress about pay during that time... then just go for whatever you have planned

 

email me on macks(AT)internode.on.net

I was already financially independent so probably can't offer you much.

 

Hey guys.

First up this is one great website for young people. It's made my Christmas. It really has. Just wondering if some of you guys could take a look over my situation and give me a few tips and clear up some grey areas before I go ahead and jump in.

I am about to purchase a PPOR for 500K by myself. I have been saving hard, have a fairly high paying job and have managed to save a fair bit. After stamp duty, fees etc are paid I will have about 150K left over for the PPOR. I have been to the banks and all the big 4 will offer me up to 450K so financing won’t be an issue.

So I need at least 100K in equity in the PPOR to avoid LMI. That would leave me with 50K to play with. What I want to do is debt recycle that to create wealth. Right now I could afford to tip in and extra $450 a fortnight as well as a lump sum of 10K each year. Which works out to be about 22K over the course of each year

Heres the start of my questions:

1. Am I better to place the 150K straight into the PPOR loan and then redraw the amount I need for the 50K investment. Or
2. Should I start an IO loan on the PPOR starting with the bare 100K to avoid LMI and put that 50K into an offset account. I would then need to buy the shares/MF with a LOC. Can you get a LOC for 50K against the 50K you have permanently sitting in the offset account?

Correct me if I’m wrong but if I go with option 1 the advantage would be that the interest rate will be the same as the home loan rate (approx 6%). The disadvantage would be is I can no longer claim a tax deduction for this debt should down the track I want to move and keep the place as an IP I can’t claim the deductions for the paid down amount should there be any left. Another question I had about redraw is that if I borrowed 70K straight up I would technically have less that 20%. Would the bank start to charge me LMI?

With option 2 I can use the money in the offset account for whatever I want (ie new PPOR way down the track) and still claim a deduction for the outstanding 400K. The downside is I’m tipping I will be paying at least an extra 0.5% on the LOC every year. But my first question is can I get this LOC against the offset? A friend of mine also said to borrow right up to your borrowing limit and then even if you only need 350K put the 100K into the offset to borrow against. Will a bank do this?? Won’t the just lend you the amount you need to buy the house and no more.

Also if I do go with option two can I pay in the 22K into the offset and then extend the LOC by 22K thus buying an addition 22K’s worth of assets. If you can do this what are people’s experience. Do you have to go to the bank everytime to complete loan doc’s for the LOC extension? Do you do it once a year or given distributions/dividends are paid mostly half yearly and you do it twice a year?

Also I am considering getting my salary paid into my offset account. If I do this is it better or can you have 2 offset accounts? One for general living, savings, and non deductable purchases and one for the amount that you want the LOC for (ie 70K)

My last question is that I may also consider double gearing and taking a margin loan against my say 50K investment. Maybe just over half or 60%. My investment is for the long term and given the depressed state of the equity markets this might be a once in a lifetime opportunity. As I said it’s a long-term investment so I can ride out short-term volatility. Any others have experience in this? Anyone know if a lender will offer discounted ML loans if you have all your stuff with them. I have a mate who does ML for one of the banks who will get me a 1% discount but only on a ML.

Am I right in my thinking? (It’s enough to make my head hurt) Does anyone else have any suggestions? I went and saw a equity home loan broker but they had absolutely no idea. It was like I was talking French. He said redraw and offsets where the same and I could walk into a bank myself and get a point 0.8% reduction on the variable rate compared to his standard 0.7%.

Thanks in advance (sorry for the long post)

 

Hi Jett,

Welcome. It is a great website!

Congratulations on buying your PPOR.

Go for 2!

It's the same interest rate (try interest only with an offset account!). Redrawing you have to do a little bit of paperwork and the bank/lender may charge you for "redrawing" funds from your loan. If you take it straight from your "offset" account it's having a bank account "offsetting" the amount of your loan. Being a bank account you can take funds out at the snap of your fingers (well, with internet banking it's a click of a button). Yes they will want to charge you LMI if your equity drops below 20%.

Where did we go from Offset to LOC??? Why would you want a LOC on an offset, essentially a loan with an offset is like a LOC (I'm sure there are some purists who could tell you the exact differences).

A bank will lend you the amount up to the value of your property. Some fringe lenders used to allow up to 107% of your property but I think they may be in a bit of financial difficulties.

I'm still not sure where this LOC idea came up, a standard home loan with a discount is cheaper than a LOC.

Getting your salary paid into your offset is the best way of doing things! Your getting your LOC (debt) mixed up with a savings/cheque account (equity). Most loan packages will allow you to have several sub-accounts to keep track of your loans for investment purposes. So you don't need two offset accounts.

If you are investing for the LONG term it may be a good time to buy, if you want to double gear and keep things simple, take the funds from your loan and you could if you wanted the additional investment exposure of double gearing, invest in a geared managed fund. Obviously there are downsides like you only get to claim the interest once from the loan but not the managed fund.

Yeah, I'm not sure if your (equity) home loan broker knew what was going on.
An offset account is a bank account linked to your loan, the funds in the offset account reduce the amount that you owe the bank/lender and they charge you interest on the net amount owing (instead of the full loan amount). A redraw facility is where you pay off the loan and have enough equity to draw the cash out of your loan.

I would strongly suggest organising meetings with home lenders at the banks, the main reason is that they deal with the back office day in day out and know the banks systems, whereas the mortgage brokers deal with around 20 to 25 lenders, even if they write 2 loans a week, they obviously don't deal with every lender on their panel on a monthly basis let alone having a solid relationship with them.

Find a bank lender who you feel comfortable and you can trust, if the rate is an extra 0.15% the service from a lender who you feel most comfortable and can make changes to your loan as necessary. Mortgage brokers don't want to know you after the loan is written, unless it's to write you another loan! The bank lender can change the system as necessary and make tweaks on your loan

Cheers and good luck, if you need help PM me.

Dan

PS This is general information, before making a loan or investment decision speak to your qualified home lender!

 

Jett

Banks will try to sell you a Line of Credit, it's their favourite way to lend you money and they will tell you that you save fees, save the hassle of going through the approval process every time you want to borrow more, etc etc
but IMHO you are better off with simple standard variable mortgage loans.

Set the standard variable loan up with an offset account so that you can hold cash in that account rather than paying money straight into the loan. As far as I'm aware you can't have two offset accounts. Getting your pay going direct into the one offset account is an excellent idea.

So you put up $100,000 and borrow the balance ($400,000) from the bank on a $500,000 property.

If your plan is to move on from this house but keep it as an IP, I suggest you pay interest only on this loan and keep extra cash in the offset account - it's effectively earning you 6% by saving you that much in interest. You can always pay off chunks of principal at your leisure if you really feel the urge, but understand that it does become tricky to unlock equity in a PPOR, convert it into an IP and get the full tax deduction. So if you are thinking in this direction there is not much incentive for you to pay off principal.

So your position is:
Home Loan: $400,000 standard variable loan (interest only)
Offset Account: $50,000 cash
Nett debt: $350,000

So now you have $50k to invest. You have to ask yourself if you can achieve better than 6% per annum by investing this $50,000. If you feel you can, then I suggest you invest the full $50,000 and gear it to a level you are comfortable with using a margin loan. Keep it completely separate from your property investment.

If you geared yourself to 50% and ended up with a total investment of $75,000 I would say that's comfortable given your stated scenario. You should still get tax deductions for the interest paid on $25,000 borrowed. Interest will cost you a little more but I think this is preferable to tying this investment to your PPOR.

So now you end up with:
Home Loan: $400,000 standard variable loan (interest only)
Investment: $50,000
Margin Loan: $25,000
Nett debt: $375,000

This should help to ensure that you don't have to pay LMI, and give you a structure that doesn't overcommit you in terms of equity to your PPOR. You will have to be disciplined, however, about building cash in your offset account. With respect to the additional $22k, my suggestion is that you keep this money in the offset account and take an ad hoc approach to further investing this. Bear in mind that interest rates will go up eventually and it will help you to have some cash in reserve just in case.

 

First up Thanks Asx for your detailed response. I really appreciate the effort you put in. You certainly covered off a some of my questions. With all the reading I must have got things a little mixed up. (My head is spinning a bit and I don't want to muck this up)

What I originally wanted to do was just plain debt recycle. My P&I repayments will be about $968 per fortnight (6%) on 350K. Say in my example I use my max equity of 50K and invest it the IO repayments will cost me $115 per fortnight ontop of this. All up loans for 400K costing $1083 a forthnight. I still plan and have budgeted to pay off an additional 20K per year ontop of this into the PPOR P&I. When I redraw that 20K back out and add it to my investment loan at the end of yr 1 I will therefore have a 70K investment loan.** Question, do you recalc your PPOR loan so that you are only paying 330K yr 2. Otherwise you need additional cash flow every year of the strategy (assuming the investment is negatively geared) Is this right. If you don't then your total loans are 420K.

The reason for the offset idea came about was after reading other's comments on this site. I wanted do do exactly the same as above but provide more flexibility if i where to turn it into an IP way down the track. Instead of paying it into the loan pay it into the offset. I thought that you could borrow against this and then add the surplus into the offset therefore reducing the amount payable on the PPOR. Same scenario but in 10 yrs time when it's all payed off I could just move the money to a new deposit. Not sell down any of my MF/direct shares and also negatively gear the old house as an IP

I hope that makes sense. If I just had the offset account and took all the money out of that wouldn't that just be the same as just investing straight into the MF/shares directly. I could buy 50K worth of shares tomorrow. If you wanted to move house down the track you'd have to sell down the portion you needed.

** Can you also redraw out the yr1 capital growth if you get the house re-valued? At 5% growth the house would be worth 525K and I could pull another 20K out.

 

Thanks C3PO. Once again really appreciate it. That was very simple to follow

I guess it's hard when I don't know what I want to do in the future. I see my self in the property for 10 yrs but it will be inner city and by my mid 30's I will want something bigger I think. If i did a traditional debt recycle then I could have paid it off by then but will I want to keep it. I would say probably yes given it's inner city and should have no troubles with good rentals. Thats why I was slightly leaning to an IO offset loan.

I guess it's similar to a response I just typed for Asx. It's what to do Yr 2 if I go the IO route. Working out in 10 years what the best option was looking back.

 

Hi Jett,

Hopefully Sim can answer some questions about debt recycling? There is supposed to be a great debt recycling article in the articles section of Invested as well

Cheers,

Dan

 

Hmmm I see what you are talking about:

http://www.mlc.com.au/docs/webcontent/pdf/build_wealth.pdf

Something along these lines??

 

thanks guys. I have read a lot about it on the net but the the examples sometimes make to broader assumptions

I suppose the difference is the with debt recycling the total loan stays the same whereas if you try and do what I was suggesting then the total loan goes up unless you re clac the loan everytime you take a increase to the LOC

Is that right. As I said it hurts your brain after a while.

 

Have done some more reading and have worked out that you pretty much have to put the money back into the PPOR loan then draw it out via LOC. Tailcat had a great post above in another thread which I have highloghted. I guess the only downfall is that if I do turn it into an IP way down the track then the money is non deductable. Does anyone else have any other thoughts

I have a few questions. I will probably stick with the big 4 banks. To set up the 3 accounts like tailcat suggests do I need to get a LOC/home equity style home loan? Coupled with a bank "advantage package" costing about $350-$390 per year for the offset? I want to keep the repayments down to a minimum and the home equity loans seem a little steeper. Comm Bank looked OK

Are Portfolio loans similar?

Does anyone have the above loan setup currently that tailcat describes?

Will a big 4 bank allow you more than 1 offet account on the "advance packages"

If you also wanted to take out the increasing equity in the PPOR (say it moves from 500K to 525K at the end of yr 1) do you have to pay say $200 bucks for a bank valuation? Is there an easier way?

I am going to see another mortgage broker but I also want to try the banks out myself and I just want to know as much as I can

Thanks guys this forum has been a BIG help!!!!