Case study – purchase of first investment property

Eliza and Mark are a young couple I have known since helping them with their first home purchase in 2017.  They are both keen on creating wealth through property, having been inspired by Eliza’s parents who retired early thanks to building a six-property-strong investment portfolio. 

In the four years since buying for $700,000, Eliza and Mark have managed to increase the value of their Campsie home to close to $1m.  The increase is thanks to a combination of capital growth and home improvements.  Eliza and Mark have spent their spare time on restoration and renovations.  They have managed to chip a fair bit off the mortgage at the same time, reducing the loan from $650,000 to $600,000.  This is how they used their equity to by an investment:

1. They refinanced their home and freed up some of the accumulated equity, accessing an extra $150k on top of the existing $600k loan, increasing the loan to $750k

2. They bought an apartment in nearby Canterbury for $600k, and used the $150k withdrawn from their owner occupied loan for a 20% deposit, stamp duty, and costs

Their new situation looks like this:

1. The family home valued at $1m with a loan of $750,000

2. An investment property valued at $600,000 with a loan of $480,000, earning rent of $420 per week

3. The repayments on their interest only investment loan are $340 per week, meaning that the loan repayments and most of the ongoing costs are covered by the rental income

Case study - guarantor/family pledge loan

Jack and Amy are a couple in their early 30s.  They had been renting together for a couple of years and approached me to discuss options.  They were convinced that buying a home was out of reach, but a mutual connection had recommended they speak to me anyway.

Both Jack and Amy are established in their careers and earning good money.  The issue for them was not whether they could afford loan repayments, but rather that they did not have much in savings.  A large portion of their income was going to rent and they were taking longer than they wanted to get a deposit together.  They had $30,000 between them and wanted to buy an $800,000 property. 

Amy’s parents are retired and own their home outright.  They were just as keen for Jack and Amy to be able to buy a home as Jack and Amy themselves.  They had previously assisted Amy’s brother and wanted to do the same for Amy and Jack.

With the assistance of Amy’s parents, we were able to get what is known as a guarantor loan or a family pledge loan.  This is how is worked out:

• Jack and Amy found a house for $800,000

• Jack and Amy borrowed $810,000 which was about 101% of the value of the house

• Amy’s parents put their home up as security to cover part of the loan

• Jack and Amy used their $30k in savings to cover stamp duty and other costs on the purchase

Amy’s parents guaranteed part of the borrowings using the equity in their own house.  By allowing Jack and Amy to use their home’s equity they could:

• Borrow enough money to get the home they were after without saving a larger deposit

• Avoid paying lenders mortgage insurance (LMI), saving thousands of dollars

The way a guarantor/family pledge works is that there are two loans – in this instance there was one for $640,000 and a second one for $170,000 (total $810,000).  The second loan was guaranteed by Amy’s parents with their property as security.  Jack and Amy are responsible for repayments on both loans, with Amy’s parents guarantee coming into effect if Jack and Amy fail to make their repayments.  Over the next couple of years, Jack and Amy will pay down the loans and hopefully the property value will rise.  Once the loan to property ratio comes down sufficiently Amy’s parents will be released from their guarantee.

Guarantor/family pledge loans are usually not the first option I recommend: there are risks that need to be understood by all parties.  In this instance it was suitable as Amy’s parents were experienced and comfortable with the process.  This was a great outcome that brought forward home ownership for Jack and Amy by a couple of years at least.

Case study - refinancing and debt consolidation

Kevin and Jane have a mortgage for $455k at an interest rate of 4.94%.  They also have a personal loan for $29k and a car loan for $19k.  Their combined monthly commitment across their debts is $3,700. 

Thanks to a rising property market their home value has risen considerably since purchasing in 2011 and is now valued at $650,000.

Kevin and Jane approached me to discuss options.  They wanted to find a more competitive interest rate, and wanted to explore finance for some some minor home improvements.

After an initial discussion to learn more about their financial position and goals, we looked at some options to use the equity they had built since buying their home to consolidate their debts and release some cash for their planned home improvements.

By consolidating their loans under a new mortgage at 3.99% we were able to:

·        Payout both the personal loan and the car loan, meaning they have only one loan to repay which has helped with their household budgeting

·        Reduce their overall monthly loan commitments from $3,700 to $2,445

·        Obtain cash out of $20k for home improvements

In addition to having the cash for home improvements they have improved their monthly cash position by $1,255.   This is a whopping $15,060 per annum.

Contact us at Blackwattle Finance to for a home loan health check.  You might be able to save thousands.