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I got out a $200,000 loan for a property that is valued at $270,000. I managed to get the property for $250,000 and I threw $50,000 at the deposit. Therefore, I currently owe $200,000. I purchased this property around a month ago

My question is, could I use this equity to purchase another place worth approximately $300,000 without using any cash upfront for a deposit since I used all of my savings as the deposit on the first one?

  • Can you add the country tag. – Dheer Sep 8 '14 at 9:52
  • OP's profile says Australia. Adding that tag for now, and will change if he suggests otherwise. – JTP - Apologise to Monica Sep 8 '14 at 9:54
  • @Dheer - Sorry mate, Australia has been added and that is correct. – Fizzix Sep 8 '14 at 13:17
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    Do you have any existing loans against the property? – Kami Sep 8 '14 at 15:12
  • This question doesn't seem clear to me. "I have $50,000 in an investment property that I own that is worth approximately $270,000." Does that mean you have $50k in equity and owe $220k on a mortgage? If so, Danger Will Robinson that's not enough equity for most circumstances and is assuming a lot of risk. – Jared Sep 8 '14 at 21:31
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If your current property is valued at $270K and you currently have a mortgage of $200k, then your equity in the current property is $70K or 25.9% This means that your LVR is about 74%. So since your current LVR is below 80% you don't pay any LMI (Loan Mortgage Insurance).

If you were looking to buy another property worth approximately $300K you would need to have more than $114K in equity (I say more because you would have to include the extra required for closing costs - including Stamp Duty if required and conveyancing costs in addition to the $114K) to keep your LVR to 80% or below and avoiding LMI. (20% of $570K = $114K).

So if you want to avoid paying LMI you will need an additional $50K or so at least. Even if you went for a LVR of 95% on the new property you would still need $69K plus closing costs, so you are still a bit short. You would also have to pay LMI on the new mortgage and you would be taking on a lot of extra risk, especially if interest rates rise (as they are likely to in 12 to 18 months time), you lost your job or some other emergency came up.

You are better off waiting some time before purchasing a second property, allowing your equity to grow further and for you to save up a bit more. You may want to open up an offset account linked to your loan account (if you haven't already) so that any additional savings you have in the offset account reduces the interest payable on your mortgage.

When you are ready to purchase a second property allow an additional 2-3% in your serviceability calculations on top of the mortgage interest rates you get, so that you don't get into trouble when interest rates do go up, or if you are on a fixed rate, when your fixed period ends and the variable at the time is higher than your fixed rate.

  • I make $790 (after tax) per week, and am about to get a rise to around $1,000. Repayments on my current mortgage repayments are around $380 per week (including body corp fees and other rates), and is permanently rented at $350 per week. Do you personally think that I could handle another mortgage? I would have a roommate that would be paying half the mortgage as rent to me. – Fizzix Sep 9 '14 at 9:47
  • @fizzix - your current property is an investment in which you are out of pocket $30/week, and your new one will be to live in and then lease a room out to help with your expenses. You may be ok income wise (but that could depend on your other expenses and whether or not you are a disciplined saver or not). However, your current equity will be your problem. Even if you paid LMI and got the new loan at an LVR of 95% you would still need to increase your current equity or savings by about $10K to cover closing costs. And you are taking extra risk buying now with property prices at their highs. – Victor Sep 9 '14 at 11:09
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    @fizzix - with interest rates at record lows and the next move in interest rates being upwards, your risk is all on the upside - meaning if rates start rising - property prices may start falling. This can become quite dangerous if you have bought at the highs with a very high LVR and property prices fall below your purchase price and below the mortgage amount - meaning your LVR is now over 100%. If something happens to you and you have no savings put aside, the house of cards may collapse around you and you may be left with nothing but debt to still pay off. – Victor Sep 9 '14 at 11:19
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First question: Could you have afforded the mortgage on a $550K property with $50K down? If not, you can't afford two mortgages which add up to that.

And the banks are going to take one look at this proposal, ESPECIALLY if they see you re-borrowing that same $50K, and come to the same conclusion. If you get a loan at all, it will probably be at a higher rate since much of your current AND future net worth is already committed.

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