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Strategies for using equity in PPOR

Discussion in 'Investing Strategies' started by nitro-nige, 12th Feb, 2010.

  1. nitro-nige

    nitro-nige Well-Known Member

    8th Mar, 2007
    Reservoir, Melb
    We're looking at using the equity in out PPOR to buy an IP.
    What strategies are available to us to do this.

    PPOR value appox 480K
    Loan on PPOR 350K
    Combined income approx 100K

    Would it matter if the PPOR is in joint ownership and the IP in single ownership. The reason I ask is because my wife works part time and hence her income is less putting her closer to the thresholds.
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    Ownership won't matter that much to the bank - it is only important for tax purposes. The bank will generally want to have as many people listed (jointly and severally) on the loan to protect themselves - meaning they can chase any one of them if you were to default on the loan.

    You have approximately $130K equity available, if you were to borrow 80% of that you would get $104K available to put towards an IP. If you assume about 7% purchase costs and borrow 80% of the value of the IP, that means you will be able to buy something worth around $385K.

    Your total new loan (equity loan plus IP loan) would be $412K @ 7% interest = $2400 per mont in interest costs ($554 per week).

    I'm not sure how the banks calculate servicability these days (you'd need to speak to a mortgage broker) ... so I'm not sure if you would qualify for the loan ... you may end up needing to buy something cheaper.
  3. GregR

    GregR Well-Known Member

    13th Jul, 2009
    Berwick Vic
    Sim is correct re ownership and whose name the mortgage is held in. Some banks care a little due to policy and if the title is in joint names, some lenders require the mortgage to be in both names and if the title is in one name, some have restrictions on who can be borrowers. Husband and wife is generally not an issue. Tax deductibility is governed by ownership and use of funds.

    Whether you buy in your name (higher income earner and negative geard IP) or your wife's (lower income and positive geared IP) will depend on your goals and type of IP.

    Your main issue will be able to refinance and set up a facility sufficient to allow you to fund the settlement of the IP. Your current LVR on your PPOR is 73%. Most lenders will be comfortable taking you to an 80% LVR (freeing up $34k, which is not enough to fund the settlement of an IP) not many lenders will look to lend above 80% LVR for a refinance and allow a 'cash out' facility. If you are able to take your LVR to 90% (allowing for LMI) then you may be able to set up a LOC facility of around $70k odd which will be enough to fund the difference for the IP. Depending on what state the IP is, you may be able to purchase a IP to $400k roughly.

    Based on the brief income information provided, servicing (by lender calculators ) should enable you to have a choice of lenders for a 90% LVR loan for the IP for a loan around $350k.

    If I can help let me know or as Sim suggests, go to your own mortgage broker and do the numbers to see if it is possible to refi your PPOR to allow the 'cash out' facility. Banks have tightened policy re 'cash out' (read LOC) and blame mortgage insurers but banks lie and it is funding restrictions more than any other reason. They do not want an unused $500 LOC facility sitting idle unused and earning no interest to them when they could have another home loan P&I instead.