May 28, 2015

Mr and Mrs Smith bought their four bedroom family home in Carnegie, Victoria in 2008 for $720,000 putting down a $144,000 deposit and taking out a loan for $576,000. The couple recently decided that they’d look at buying an investment property so they contacted their mortgage broker to discuss finance.

Their broker suggested that they get a valuation of their home, and they discovered that it was now estimated at $950,000.

Over the years Mr and Mrs Smith had paid $120,000 off their original loan leaving $456,000 owing on the property. Today’s valuation of the property, less the outstanding loan, left them with $494,000 worth of equity.

Based on the current property value and assuming they could afford the repayments, they decide to buy a two bedroom apartment worth $550,000. They will need $150,000 to cover an initial deposit of 20% plus stamp duty costs to avoid paying a lenders mortgage insurance fee.

Step 1: Get a valuation on your home. Many lenders allow you to do this before submitting an application which is often cost and obligation free.

Step 2: Refinance current loan of $456,000 to $606,000 freeing up $150,000 cash to use for the investment property. $606,000 is under 80% of the current property value so no lenders mortgage insurance will be payable.

Step 3: Buy investment property and apply for a second loan for the remaining 80% of the purchase price ($440,000).

Important Considerations:

– Even though the loan of $150,000 is secured against your home, the purpose of finance is for an income producing investment and therefore tax deductable. It’s important to keep this loan separate from your existing home loan which is not tax deductable.

– Once the refinance is complete the bank can cash out $150,000 into an offset account so no interest is charged until funds are used for the investment property purchase.

– Setup the investment loan as interest only repayments and use any surplus to pay down your non-deductable debt.

– Some lenders allow you to refinance up to 85% without paying lenders mortgage insurance which could mean freeing up equity sooner.