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How to best access your equity & the Investing in the post APRA environment
Marty McDonald
From a lending point of view there are really only two things property investors need to keep investing successfully. Equity to leverage off and the capacity to prove serviceability to lenders so you can keep using their money to invest.
Equity:
If you own property in Sydney and have done so for a few years it is quite likely you are sitting on some significant equity in your home. But how do you best access that equity? First let’s define equity and what I call “borrowable equity”.
Using the example of a home worth $1,000,000 with an existing loan of $500,000.
- Equity is simply the value of your property less the amount owing against it ie ($1,000,000 - $500,000 = $500,000). Pretty straightforward.
- Borrowable equity is the value of your property multiplied by loan to value ratio your lender (or you) are willing to extend against the property, less the amount already owing. Let’s say a gearing ratio of 80% is where you and the lender are comfortable. In that case the borrowable equity would be ($1,000,000 x 80%) - $500,000 = $300,000.
- Equity is simply the value of your property less the amount owing against it ie ($1,000,000 - $500,000 = $500,000). Pretty straightforward.
- Borrowable equity is the value of your property multiplied by loan to value ratio your lender (or you) are willing to extend against the property, less the amount already owing. Let’s say a gearing ratio of 80% is where you and the lender are comfortable. In that case the borrowable equity would be ($1,000,000 x 80%) - $500,000 = $300,000.
So how do you access that borrowable equity?
I recommend that before you locate the investment property that you want to purchase (or even before you start looking) you apply for a loan against your borrowable equity. Once settled you have this loan available to draw on when needed for the deposit and costs associated with buying. Typically this will be an interest only loan or a line of credit as you don’t want to be paying interest on this loan until you actually need the funds. Using the example above you would put in place a loan for $300,000.
You may also at the same time apply for a pre-approval for the purchase loan to be secured solely by that property itself. Usually at an LVR of 80% or 90%. Doing this means you’re ready to go once the right property comes along and it also helps the lenders know what you intentions are for the $300,000! (Even if you won’t be using all of those funds for the new purchase deposit and costs).
By having this “equity” loan available and ready to draw on and the pre-approval in place for the purchase itself it means you can keep each property separate from each other ie you can avoid having them cross collateralised. Cross collateralisation referring to when the lender uses more than one property as security for a loan. I’ll leave the myriad reasons why you should avoid cross collateralisation for another blog post but for today let’s just say it will give you a lot more control over your finances in the future.
Serviceability in the post APRA / ASIC investor loan crack down
Apra for the deposit taking institutions and ASIC for the non-banks have done a very good job in forcing the lenders to change the way they assess investor loans. This is all to keep the growth in investor loans to less than 10% pa. At the time of writing it looks like the lenders will easily meet these targets and I think many will now start to loosen things up a bit. The idea for them is come in at 9.99% pa as they don’t make money without writing loans! I’ve often thought it is a brave regulator that gets in the way of the big banks profits and I think we will see some push back from the lenders on this front over the next few months if their lending is slowing. This won’t necessarily be published however and is likely to be done with under the table discounts for good clients and exceptions to current policies also done on a case by case basis. There are also still a few lenders who assess existing home and investment loans a bit more generously than others.
For those investors who are looking for ways to increase their borrowing capacity, the catch cry is “yield”. It is all about that at the moment as 3% yields which are typical for houses in Sydney make borrowing to invest very difficult for average wage earners. I am seeing a lot of borrowers going for 6% + yields in places such as Qld and Tasmania.
More than ever it will make a positive difference to your investment options if you partner with an experienced and investment focussed mortgage broker.
Please feel free to make an enquiry by calling me direct on 0416 045 254 or by email at marty@mortgageX.com.au
http://mortgageexpertsonline.com.au/
About the Author: Marty McDonald is principal of mortgage broker “Mortgage
Experts”. Marty specialises in assisting active property investors with loan structuring advice and
implementation as well as helping credit worthy borrowers with slightly outside the box income and employment
situations. Find Marty on
Facebook and
LinkedIn.
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