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Home owner looking to invest in property

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Mark | 18 Nov 2013, 12:39 PM Agree 0
Currently have 430k loan for our house (3 yrs old), it would be valued above 500k, so 70k equity at least (can I borrow 700k?). We have joint income of 140k, the loan still has 27 years. Should I look at investing now or pay off the morgage? It just seems owning an investment property will generate a return that covers the interest only loan, plus all the other deductions. I know asking is taking the easy way out but is it that simple, interest rates can only go up is it to late to join the market?
  • Mark Coburn | 19 Nov 2013, 10:35 AM Agree 0

    You need to start by creating the four major steps you need to build a stable property portfolio:

    Step One: Planning
    Strategic Plan: Where do you want to be and when?
    Structure Plan: How are you going to hold your assets?
    Risk Management Plan: What are the risks and how are you going to manage them?

    Step Two: Finance
    Finance Plan: How are you going to structure your finance and when do you start to pay down debt?

    Step Three: Property Selection
    Property research is in 2 categories: statistical and fundamental. There are 15,000 suburbs around Australia, you need to pinpoint the suburbs that have a demand/supply imbalance. These areas have the best chance of increasing in value well above the national & state average.

    Step Four: Purchase
    Now you are ready to buy and you know exactly what to buy and where. A proper plan lets you sleep at night knowing you have managed most of your risks.

    Regards Mark Coburn 0405 243 547 -
    Stepping Stone Buyer's Agents - Property Investment Advisors
  • Mark | 26 Nov 2013, 01:17 PM Agree 0
    Thanks Mark, I will look into and do a lot more research, thanks for leaving your number I will hold onto it. I am also concerned with a property bubble, which I think is a pretty big risk especially with the state of the economy, but alas that obviously is part of investing.
  • Goodo | 26 Nov 2013, 01:40 PM Agree 0

    Lenders will normally lend up to a maximum of 80% of purchase price without requiring mortgage insurance. This means to avoid mortgage insurance, your "equity" will be reduced to 80% of the bank value of your unit LESS the outstanding loan balance. In your case if the Bank valued your property at $500K then 80% is $400,000 so you have NO "Borrowing Equity" without the cost of Lenders Mortgage Insurance (LMI). You can increase this to 95% but will be required to pay LMI - this will get expensive!

    Most lenders will max out at 90% + LMI for Investment properties so you will need to cover 10% deposit + 5% costs). This will give you an idea how to work out the "Equity" side of the loan that a lender will require and your maximum borrowing amount.

    The other major side that a lender will consider is the "affordability" or your ability to repay the debt.

    Under Gov't regulation all lenders are required to ensure they are not placing you into financial hardship by giving you any new finance. To do this they will want to see income (wages / new rental etc) which will cover the following:
    1. Any and all loan commitments that you have + new loan. The lender will stress test the repayments by about 2% to 2.5% above current variable rates (work on 7.5% to 8.0%)
    2. A reasonable standard of living - they will use set tables for minimum living costs This will vary based on marital status & number of children.
    3. Have surplus funds left over.

    I suggest you talk to a good local broker or you can contact me.

    Stephen Goodwin
    Franchise Owner
    Resi Mortgage
    0405 388 467
  • Mark | 28 Nov 2013, 08:35 AM Agree 0
    Thanks Stephen,
    Yes I realised this after donig some research, I'm still a long way off but appreciate your response. I may consult a financial advisor early next year.
  • Jimmy P | 17 Dec 2013, 03:48 PM Agree 0
    Hi Mark, be sure to check the following websites when you do your research:

    1. realestateview
    2. properties.mitula

    Good luck!

  • Ellen P | 25 Dec 2013, 12:08 PM Agree 0
    Since you've already bought your own home where as per Stephen's post, you don't have any accessible equity for further borrowing without paying hefty LMI.. Your best bet would be to take advantage of the low rates, furiously pay down your current mortgage as much and as fast as possible, to put you in a better equity position for investing later on when the market corrects itself since rates are at all time lows right now and prices have shot up in many places as a result.
    Start by getting educated (while paying down your mortgage), so you can make an informed decision and strategic planning, not just jumping in for fear of being too late. There are always opportunities around the corner if you know how to spot them. PS - don't bother ask uncle Joe how to invest. Listen carefully to people who have the results you're after. Good luck!
  • Patrick Y | 01 Jan 2014, 10:44 PM Agree 0
    Hi Mark,

    To answer your questions, bluntly yes.
    But let me ask you, do you want to live in a lifestyle where you do not have to be financially tied down, working 40-50 hours a week and spend little time with your family and friends? Do you want to travel the world with your partner/ family, do you want to explore nature's finest secret treasures? Or drive a car that turns everyone's heads? Do you want to escape the rat race?

    If you have answered yes to any of the questions above, I suggest you to invest before anything else. Why pay off your mortgage? I know and I can guarantee you that most people in the world believes that debt is bad. But there is a difference between bad debt and good debt. What is bad debt? Simple.. luxuries like a car, fancy watch, holidays, famous brands on clothes etc. And then there is good debt, what is this you ask? It is really what we call in property INVESTMENTS. Sure we borrow money from the bank at 80% or 90% or 100% of the loan, and we are in "debt" but its good debt because we can do many things with that debt LIKE; claim tax deductions on your investment property, this SAVES money and lowers tax how? Where your cash flow is less than your outgoings to maintain that investment is called a shortfall and therefore the difference PLUS tax deductible items such as depreciation of your investment (lets say all up 30k) is taken away from your salary lets say 70k/year, and your net income is 40k, which lowers your taxes paid, which in reality gives back money. Further, calculated risks and investments, and researched investments grow in capital and you can take it out (equity) and refinance like you said, and repeat, repeat, repeat etc. All in all, dependent on the loan amount, you may pay as little as $50/week to maintain an investment property.

    Further, why pay off your mortgage? Like I said most people believe debt is bad and minimising this debt is a good thing, but by using your HARD earned money on principal + interest, lowers your cash flow and in reality you will never escape the rat race if you don't start investing! I have two principles when it comes to investments. UPM and UPS - use other people's money, and use other people's skills, that way your cash flow and savings will be enough to possibly buy 2 investments at once or 3 or 4 or 10 or 20 etc.

    Lastly, let's say if you don't invest, lets say 30 years time you paid your mortgage off, what then? You will most likely retire around that time, you will have barely any savings to cover your retirement fees, and superannuation isn't going to cover it all. MOST Australians are stuck in this rat race because they don't understand or know of these concepts, if you invest, you have capital growth sometimes even calculated capital growth (minimising and lowering risk involved), no matter what the interest rates are at, in the long run, you MUST look at the bigger picture where CAPITAL GROWTH on good investment properties outweigh the reason to NOT buy it at all. GO TO REALESTATE.COM.AU search for one bedroom apartment in Pyrmont Sydney, let me know the price. I will say only this, 20 years ago it was valued at only 200k if not less. BIGGER PICTURE!

    If you would like to hear more about my thoughts or any questions at all, or I can guide you through step by step my method of investing, and building your property portfolio, so that you can sit on a beach in Cyprus for a years long vacation, driving Maserati cars, escaping the rat race.

    Best regards and best endeavours in whatever you choose to do,

    Oh and happy new year!

    Patrick Y.
    Property Sales Consultant
    VA Australia
  • Tom | 16 Jun 2014, 05:09 PM Agree 0

    First, arrange to make your current loan interest only and set up an offset account. The reason for this is that one day your current house may become and investment property so you would want to maximise the debt that could become deductible for tax purposes. Instead of repaying the loan you just place extra funds into the offset account and the net result is the same, a reduced interest expense. This strategy gives you flexibility for the future.

    Let me provide you with some numbers for clarity. Your current loan is $430k. Lets say over the next five years you pay down the loan to $230k (total principal repayments of $200k). If you use an offset account and the loan is interest only your total loan outstanding after 5 years continues to be $430k. Your offset account balance is $200k. Under both scenarios your total interest expense would be exactly the same.

    Now suppose that you decide to upgrade and use your current home as an IP. If you had payed down the loan to $230k, and redrew $200k to purchase your new home (Primary Place of Residence), only the interest on the $230k would be tax deductible. However, if instead you used the offset account and interest only loan structure, you could use the $200k in the offset to fund the purchase of you new home and the interest on the $430k loan would be tax deductible.

    A very important point to successful property investment is having the most appropriate financial structure in place for your circumstances. Another very important point is to have experienced and knowledgeable advisors on your side. A good mortgage broker would be able to set up the best structure for your current situation. He would also be able to tell you if you would be able to obtain finance to purchase an IP. Currently the $70k equity in your current home is insufficient to use for a deposit on an investment property. Assuming you do not have other funds for a deposit you would require 100% plus in financing (financing would need to cover buying costs such as stamp duty, titles office fees, building inspection, conveyancing, etc). A good broker would be able to tell you if there is a lender that would provide such financing given your current financial situation.

    You may also want to consider using a good buyers advocate to find your IP. They do charge a fee but usually the fee is well worth it. A buyers advocate is in the house buying business on a full time basis. They are more likely to find good investment grade properties than the average person on the street. They also have access to off market sales which the public generaly don't.

    Happy to discuss further if required (0422 607 035).

    Good luck,
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