To invest or not to invest?

13/10/2011


Question: My wife and I own our townhouse (strata title) outright with no mortgage. It’s valued at around $300,000 and located in NSW. We hope to sell this and buy a bigger house later in the year so we have more space for our children.

In the meantime, I would like to buy our first investment property by using our townhouse as leverage before it’s too late. Would a bank allow us to take out a loan so we can buy a similar priced investment property? If so, what’s the minimum amount I would need to invest for a portfolio like this?

Would this prevent us from selling our townhouse and buying another principal place of residence (PPOR) later in the year? Do you think we should we buy the new house before jumping into the property investment market?

Answer: You have a number of questions which I will answer one at a time.

Firstly, from an equity position, I can see no reason why a bank wouldn’t lend to you. You say you want a similarly-priced investment property, and since you’ll most likely also be providing the investment property as security for the debt, the total values of $600,000 should qualify you for a loan of $480,000 from an equity perspective.

The thing is, a bank also requires you to qualify from a serviceability point of view. Put simply, income from all sources (including 80% of the potential rent) has to be ascertained as being enough to service all of your debt – in this case, that will be the investment debt only. As I don’t know your situation regarding income, I can’t say one way or another.  A rule of thumb is to work out whether 30% of your gross annual income (including rent as mentioned) would be sufficient to meet loan repayments. That will give you some idea as to whether you’ll qualify for the loan you want. You’ll need about $310,000 in total to buy a $300,000 property.

Be sure that you obtain a flexible loan which has the feature of being able to ‘substitute security’. This means that, as long as the new property is the same value or more than the one you wish to sell, you can simply transfer the loan onto the new property at settlement, rather than have to pay out one loan and establish a new one. This saves loan stamp duties and establishment costs and is a cost-efficient way of doing it. Of course, you’ll have to find a new property which is going to settle on the same day as the one you’re moving from for this to work. Some banks, however, will be happy to accept the proceeds of the sold property as cash security for the loan (held as a term deposit) until such times as you find a new home to live in, in the event that you can’t time the two events simultaneously.

Answers supplied by Margaret Lomas, Destiny Financial Solutions (www.destiny.net.au)

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