Just wanted some advice. I currently have a property worth about 1.1million and owing about 700K. Was hoping to use the equity as a deposit for an investment property. I've been reading forums and people have suggested not allowing 'cross-lateralising' loans i.e. not combing the home loans into one or using one property as collateral for the other. Also people suggest diversifying home loans - using different lenders.
Does anyone have experience regarding taking a loan out and using the current property as collateral and then using this as a deposit for a loan with another bank?
Using equity
funnybunny on 16/09/2016 - 17:22
Comments
How about we open up some detail on your scenario first…
How much equity do you have from your original loan? You say your property is "worth" 1.1 million and you owe 700k, but was your purchase price actually 850k-900k? A bank's valuation will be very different from a website or drive by valuation a real estate agent will give you, particularly when you are looking to use it as collateral for another investment.
I think it would be preferable to have the two loans not linked. In case something was to go wrong, you wouldn't want to jeopardise one with the other.
Strip out the cash from your existing loan. Buy investment property. Maximise the interest you pay on the investment property loan. Claim deductions. Keep beefing up your offset account on your PPOR. Rinse. Repeat. Profit.
Generally speaking there is nothing wrong with maintaining a highly divisible portfolio ceteris paribus. The problem is, however, that your options may not be as sharply priced if you divide up your loans between lenders.
In short, some lenders offer owner occupier interest rates on investment debt if you cross-collateralise. This could save you 20-30BPS p.a. off of a regular investment loan. Furthermore, many lenders look at your aggregate debt portfolio with them and offer larger discounts for larger debt portfolios vis a vis a $1,000,000 aggregate debt portfolio typically gets a much better discount/rate with most lenders than a $200,000 aggregate debt portfolio does. Lastly, most lenders will charge a single annual fee across a whole debt portfolio. If you have products with different lenders you may find yourself paying two lots of annual fees (this, however, can be circumvented by choosing lenders with no annual fees, but that is sometimes easier said than done depending on your requirements).
The downside to crossing is the portfolio is slightly less divisible, which is a big headache if you plan on frequently buying and selling or chopping/changing your mortgages. For most people who stay in a loan for 24-36 months, this is realistically not a difficult problem to surmount and can be justifiable if the cost savings from crossing the loans is significant.
Speaking as credit advisers, we have nearly 15 years experience helping clients do this. Many people establish a sub-account on their existing mortgage (separating out deductible from non-deductible debt for accounting purposes) and use that equity released to purchase an investment property. Others will do a full finance restructure and cross-collateralise. What makes most sense in your particular scenario will be heavily determined by your specific financial profile (including the type of properties offered as collateral), your goals over the coming years and the finance options available to you.
If you wanted to discuss your scenario please feel free to send us a PM.
Hope this helps.