Home Loan Rates Tips and Guides for A Better Loan Experience
Doug has a home in Ryde worth $1.5M, with a home loan of $500,000. So I guess we could say that he has 'equity' of a mill. But is this useful?. The banks generally lend 80% against the value of a property - us bankers call this the BV, being the "Bank Value" or "Extended Value".
Given Doug's home is worth $1.5M, banks would be able to lend up to $1.2M (being 80%). So really, the amount of 'usable' equity is another $700,000. With me?
So Doug has two choices. Should he slog it out trying to pay off his home over 15 years with his after-tax dollars, or should he tap into the equity in his home this spring to buy an investment property for $1M which will hopefully double in value over this time.
Any bank would happily lend him the $1,040,000 he would need to fund this investment, being the purchase price plus stamp duty.
In the background, the banks will be happy to extend to Doug 80% of the value of the two properties they will have a mortgage over. Well, 80% of both properties totalling $2.5M is $2M. So he shoes it in - as his home loan, plus the investment loan he'll need, comes to only $1,540,000.
Of course, any approval would also be subject to his ability to service these loans, but that's another story.
This new investment loan of $1,040,000 would be at the higher "investment rate" as most banks price on 'purpose' that is, the purpose of the loan, which is clearly 'investment'.
Let me tell you what I did for Doug last week (lucky he reads my articles), which is much smarter.
We're refinancing his home loan (it got approved yesterday), but we're increasing his limit to unlock all his 'usable' equity of $1.2M. Naturally, we split it into Loan A and Loan B to keep his 'home loan' separately identifiable. Tax-deductible debt must be kept separate so it can be maximised so Doug can concentrate on reducing the loan that he will service with his after-tax dollars, being his dreaded home loan.
Here's the important thing: With most banks, any increase (like the $700K we're about to unlock for him) will, unfortunately, attract the 'investment' rate... but not all banks…
We structured Doug's situation as follows:
Loan A: $500K refinance of home loan. Attached to this will be his everyday 100% transactional offset account
Loan B: $700K Equity Loan, attached to this will be a second 'Investment offset account', which on settlement will carry the full $700K, so the effective balance of Loan B, will, of course, be nil, and will attract no interest. It's just like a Line of Credit that hasn't been used.
The cool thing, and the point of this article, is that both these loans have an owner-occupied rate of 2.78% - awesome, hey?
If he does eventually decide to buy that $1M property this spring and need funding of $1,040,000, well, he can borrow $340,000 against the investment property itself. Sure, this portion will attract the higher investment rate, which can be fixed for 2 years at 2.49%. But the bulk of his investment loan (Loan B, which would already have been established against his home) is at the whiz-bang owner-occupied rate of 2.78%. What a top result.
This also beats the life out of the two properties being cross-collateralised too. Your banker will never tell you that, or the associated risks. They're not allowed to. They work for the bank. But it's funny that the same banks pay me, to work for you for free. How cool.
Doug, we'll have the docs for signing next week - not that your name is really Doug :)
In 3 weeks, 'Doug' will be in a unique position, having his equity unlocked. He is free. Here's something interesting: If he finds an investment property for $650,000 man he can just write a cheque from his Investment Offset (against Loan B) to buy it. So he can negotiate to settle in a matter of days. I wonder how much he'll be able to shave off the asking price given he can uniquely allow the vendors get their hands on their money straight away? (the correct answer here is around $80K in my experience anyway, last December when I bought a townhouse from my offset).
Over the years Doug will become a little wealthier than those like him because he gets specialised free advice. The banks pay me to do what I do. I will not allow him to make silly mistakes and will guide him and his adult kids along the way. I'm not smarter than Doug, I'm just a specialist in what I do, like he is.
Pop Quiz, hotshots. Doug's wife is on a higher marginal tax bracket than himself ...if he buys this $1M investment property, to maximise negative gearing, should he (a) buy it in his wife's name (b) buy it 99% in his wife's name or (c) buy it jointly? Man, I love this stuff.
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