The Correct Investment Property Finance Structure is critical to the tax effectiveness of your investment property and provides a level of risk minimisation by way of separating any 2 or more properties.
For example let’s say you have a home worth $600,000 and you have a mortgage of $300,000. You purchase an investment property for $550,000 and need to fund the entire purchase price plus costs. If you went to your bank they would simply give you a loan for $570,000 and cross securitise the 2 properties together. This means they add the value of your house to the new house, tie the 2 properties together and lend you the full $570,000.
That’s pretty simple to understand and the loan would be easy to setup and manage but what happens if life doesn’t go so well and you find yourself in financial hardship and cant maintain your mortgage ? The bank will come in and sell you up and because both properties and loans are linked to each other (cross securitised) they will put both homes on the market. Here you have o control and run a very high risk of having you own home that live live in sell first and your left whiteout a home.
Now lets look at a different way of setting up your financing options. Before we go into numbers I will give you an explanation of the method that provides a higher level of security to you and your family and still finances the new investment property plus the costs. What we do is apply for a new loan secured against your current home for the amount to cover a 20% deposit for the new investment property plus enough to cover the purchase costs. This facility is often setup first, even before you start looking. The new loan accesses equity in your existing property just like the bank would do with a 100% loan plus costs, except in our case we are controlling how much equity they can have access too. The loan cannot exceed 80% of the value of your current property meaning there are no additional mortgage insurance fees to pay. The New Loan serves as a source of funds for the deposit and fees towards the purchase of an investment property.
Once this loan is in place we then setup a second loan to purchase the new investment property. This loan will only be for 80% of the value of the new property with the first loan providing the balance of funds. Another benefit of this system is that we can go to another funder if we choose to or stay with our current bank. I doesn’t matter but the important point to note here is that we have control. Not the bank.
In summary this type of loan setup creates a firewall between the 2 properties. The funder has access to only one at a time and if ever you need to sell, you are in control. It also ensures we have equity in all our properties.