It makes no difference if your building your investment portfolio because your Accountant has told you to get some Tax offsets or you like the idea of building your wealth and income through property.
The most important thing to be aware of when borrowing is Cross Collateralisation and the risks it can bring down the track.
What is Cross Collateralisation? basically it’s using the equity in your home (or current properties) to secure the new purchase to allow you to borrow 100% of the purchase price plus costs.
An example:
Lets say I have my home which is valued at $650 000.00 and the loan is $250 000.00. To find out the equity I have in my home I multiply 80% of the value of the home and subtract the current loan = 650000 x 0.80 – 250000 = $270 000.00.
This means I have $270k available equity to put towards the purchase of an investment property.
So lets say I find an investment property for $400 000.00, then I can use both properties to borrow 100% of the investment funds however the overall value would still be under 80%…
Home $650 000 Loan $250 000
Investment $400 000 Loan $420 000
Total assets $950 000 Total Debit $670 000 Total Loan to Value Ratio (LVR) 70%
Cross collateralisation can make the loan process faster, easier and allows you to borrow the maximum funds to claim the maximum Tax benefits. Cross Collateralisation does come with the following risks;
- Should you decide to sell one of the properties then all properties will need to be re valued
- You can be forced to repay some remaining some loans to reduce overall debit
- It may require structuring your loans and or refinancing to another lender
- Some lenders require you to demonstrate ability to repay remaining debit which could be an issue
- you may be required to sign new Mortgage Documents
- you are unable to use different lenders to take advantage of special rates
The good news is there is a way around Cross Collateralising your loans which keeps all the properties stand alone, allows you to have access to deposit funds when you sign a Contract of Sale and also gives you the benefit of shopping around to get the best package for you. This option is called The Investor Hub Loan.
If you want to know how the Investor Hub Loan works then download your copy here.
For more information or to get a free property report to see how much Equity you might have available contact me or book a time to discuss your personal circumstances here.