21/07/2008
Q I’m 27 years old and I have one investment property worth $280,000, with debt of $249,000, achieving a rent of $265 per week. I contribute roughly $115 per week to the mortgage repayments. I want to get another investment property, valued at up to $200,000 but only have $7,000 in savings. I’m not sure what my options are. I take home $42,000 annually after tax, but this should increase to $53,000 later this year. Do I have enough equity to contribute to the deposit? Should I get a 110% loan, or should I continue saving until I have enough for an 80% loan with no LMI?
A 110% loan is usually only possible where you have enough total property equity to ensure a loan to value ratio (LVR) across all property of no more than 90%. When investors borrow 110% of the value of a property, they have sufficient equity built up in other property to keep the total LVR within bank lending requirements.
There are a few lenders who will provide 100% loans against a single property, using a second mortgage arrangement, which is both costly and difficult to obtain.
In your case, your current property is already at 89% LVR. As 90% of property value is the maximum allowable investment loan, you essentially only have $3,000 left available in your first property’s equity to borrow against. Added to your $7,000 in savings, this gives you a gross amount of $10,000.
Since lenders mortgage insurance (LMI, which you must pay to protect the bank, since your loans would be more than 80% of your properties’ values), stamp duties and conveyancing costs would add up to more than $10,000, you aren’t yet in a position where you can buy again.
Let’s project this all one year down the track. If we assumed a low 4% growth on your current property, and you could save all of your pay-rise ($11,000 after tax), you would have:
· Property valued at $291,000, allowing a $262,000 loan at 90%
· Savings of $18,000
· Usable property equity of $13,000 – the difference between your loan balance ($249,000) and the maximum allowable loan on your first property at 90% ($262,000)
· Total available deposit of $31,700
If we assumed $10,000 in purchasing costs, this leaves $21,000 to use as a deposit. At 90%, this amount would give you a potential purchasing power of around $210,000. I don’t expect huge rises in values anywhere in Australia in the coming 12 months, so at this time next year there will still be plenty of stock available in the $200,000 range. I do expect rental yields to rise on most properties, however, so by the time you’re ready to buy again, you may see even better rental returns than you would if buying today.
On a final note, by my calculations the shortfall for you on your current property ($115 a week) sounds a little high, given the rental returns and loan amounts you’ve stated. Have a quantity surveyor complete a Depreciation Schedule on this property and then submit an ITWV Form (a request to vary taxation) immediately to the Australian Taxation Office. This will ensure that you’re receiving your tax breaks, both for your actual loss and for on-paper deductions as a result of depreciation, every week, in your pay. It makes more financial sense for you to get your tax breaks every time you get paid rather than as a lump sum at the end of the year – you can use the money to meet your mortgage repayments.
Margaret Lomas
is the director of Destiny Financial Solutions, a qualified financial advisor and author of a number of books about property investing. Her newest and most exciting book to date The 20 Must Ask Questions® for Every Property Investor was released on 1 April
