LOC serviceability

Hi All,
This is my first post. I have been lurking for a few weeks and have learnt so much. My compliments to everyone who posts for sharing their time and knowledge. I recently finished reading Jan Sommers book and was left with the wonderful feeling that I am actually far better off than I ever though. Having read the posts here concerning living off equity, I am even beginning to wonder if I really need to return to work again!
Until a few weeks ago I never even knew about LOC loans which has been a great discovery because although I have a PPOR worth around 850k fully paid off, I have a relatively small income from interest on savings and Family Tax benefits.
I would be very grateful if somebody could address a couple of questions that I have concerning LOC loans.

Firstly is the serviceability criteria for obtaining a LOC the same as for a normal home loan? I am concerned that I may be unable to obtain one because of a lack of income.

Secondly, why is it that most people talk about using their LOC to fund only the deposit on a new IP and then obtain another loan for funding the other 80-90% of the purchase? Why not simply use the LOC for 100% of the purchase price. Is it simply a case of being able to find a better interest rate with the normal mortgage?

 

Hi Lorrimer,

Welcome to InvestEd. Quick answers from experience:

In our case the LOC was a StGeorge portfolio loan so the criteria included the usual servicability criteria. They noted that the loan was for investment purposes but didn't pursue what the investment was, so we never had to prove servicability on the investment returns, just income.

Secondly, the reason for using the LOC for deposits only is to enable the purchase of the most properties possible without cross-collateralisation / cross-securitisation (whichever term you prefer) and assuming you can service them. It follows the maximum loans to gain maximise exposure to capital growth idea, for when you're building a portfolio. Avoid cross-collateralisation means that you can go to another lender when you hit the first lender's borrowing risk level (e.g. 750k). But the amount you deposit is your choice depending on where you're at investing wise. Certainly you could put in more than 20% if that fitted your strategy. In our case we're building and want to stretch as far as we safely can, so we would use 20% as we wouldn't use all our equity in one hit.

In this instance we actually put the money into a Navra Investment fund instead, to boost cashflow (loan around 7%, income around 10+% and still looking good) which has worked well so far.

There are other techniques possible if you can't get the loan based on a regular income stream, these are called cash bonds and work using annuities. I have never used one so it would be best if Steve Navra, or someone who has used one, explains this particular process.

HTH, Dave

 

Hey lorrimer

You can get a no doc LOC against your property. It's not means tested against your income and you only generally need a stat dec declaring you can afford the repayments.

Many self-employed and high-worth investors make the income but claim all sorts of things that make them look like they'd be better off on social security. Depreciation, previous losses, interest pre-payments, allowances, etc all lead to tax savings but tax savings mean poor serviceability in the eyes of the lender. Some of them add these back when calculating serviceability, but often it's more complicated. Hence, no doc loans are great.

-T-

 

Welcome Lorrimer

Great position you're in ! With $850K equity you'd likely secure at least $650K in a LOC (80% or thereabouts).

If Investment Properties were part of your strategy, the 'usual' way would be to use a portion of that $650K as sufficient deposit to buy an IP (usually via a different bank to stay under their radar) while avoiding the extra expense of mortgage insurance. Of course the property you buy would meet your criteria (such as the Steve Navra 'rental reality' you'll find elsewhere on InvestEd). The incoming rent would pay off a fair swag of the 'other' bank's interest only repayments, and with tax benefits at the end of the year you should look ok, plus your capital growth should be 5% + to help fund any shortfall. Of course as soon as any equity is apparent in any of the properties (original or newly-purchased) you try to draw it out and add it into the kitty of available funds ;-)

The idea is to repeat that process for as long as you can, till your income no longer substantiates the investments (at which point creative financing comes into play )

If you can't find properties to meet the criteria, Steve's strategies involve getting your 'lazy' equity into something that makes an income - managed funds usually being an option. An advantage of using the Navra Invest managed fund is its relatively conservative nature, fairly stable returns (disclaimer - its a managed fund - you can still lose) and the fact it pays a quarterly dividend. These dividends can then pay the LOC interest and leave some left over, all being well, for lifestyle, investment or whatever.

I hope I summarised that ok... I think Gramps 2003 Vintage Cab Merlot is an absolute bargain at $16 but unfortunately I'm at the wrong end of a bottle ;-)

Cheers
Carl

 

Thanks very much guys for all your reassuring answers.
Collectively you have not only answered my questions but also given me extra food for thought.
It's all slowly coming together in my head now what I should be doing.
Time to get my lazy dollars to work I think!
Now I just need to get out of the mindset that debt is a bad thing that should be avoided.
Does anyone know a good website where one can compare all the low doc LOC's that are available?

 

Hey Lorrimer

As your finance solution is important and specific to your needs, the "do it yourself" option might mean you miss out on some of the good offers out there with financial institutions ... some of which are unadvertised or poorly explained.

A good mortgage broker will work wonders for you, at no cost to you (the bank pays their fees) - we use Rolf at www.asapfinancial.com.au and he has worked some absolute magic on our behalf. ;-) He also has a great understanding of the Navra style and other wealth creation strategies which helps keep things flowing ...

Good luck
Carl

 

Hey Lorrimer

I agree with Carl; a broker is the way to go. They get discounts due to taking admin work away from the bank (I assume). Even after their 'piece of the pie' you end up with significant discounts compared to any standard advertised rate. After you hit say $1m in debt, then you get further discounts.

For example, I have a 5.84% fixed for five years on a mortgage from when the variable rate was high-6s. No chance of that through the bank or NBFI.

Good luck

 

I backup T's comment with another broker advantage - I have low on-paper income, my wife works 2.5 days per week and we have a (very high maintenance!) dependent child, and 2 boxer dogs that are more expensive to keep than your average zoo collection.

However I have loans above $1.1M, which my previous bank manager would have choked laughing about, had I asked for it ;-) All thanks to the magic of a broker who knows who to ask, and how ;-)

Whether that is something to boast about or not, depends on your opinion of debt, I guess ! I sleep better at night now though, than I used to 5 years ago with a $60K debt ;-), 'cos I know my money is out there workin' instead of me

Cheers again
Carl

 

I can second Carl's suggestion to use a good independent mortgage broker. Rolf is great- I've used him for a while now and only have wonderful things to say You can always use other lender's rates to secure a better deal, when the time comes to comparing. Depending on how much you're borrowing, you can also apply for some professional packages with particular banks, which can see rate reductions and fee waivers form part of it all.
Good luck and well done on having that much equity! Impressive