Should I lease option as a tenant, buy now, or keep renting and wait until Sept 2005?

[mmerlin]

Hi everybody,

I'm looking for opinions and/or advice regarding my personal residential situation.

My scenario:

In 1996, I bought a small 3 bedroom house (as PPOR) at Indooroopilly (Queensland), on steep block with nice views of Mt Coot-tha. Lived in the house for a while, then moved to Melbourne (Victoria) 6 years ago and have been renting here ever since. Have rented 5 properties in various suburbs of Melbourne in the 6 years I've been here, and now have a fairly good feel for the place

Since I have now decided that I will be permanently settling in Melbourne, I would like to keep the Indooroopilly house as a long term investment property, and I would like to buy a PPOR here in Melbourne (sooner or later

Now, the problem is, right now I don't have the deposit for a $400k - $600k property (I would like to live in one of Melbourne's bayside suburbs... Port Melbourne, Middle Park, Albert Park, St Kilda, Elwood, Brighton).

But I do have:
Indooroopilly Investment Property
Rent: $250/week, less fees/rates/maintenance approx $40/week.
Approx value: $250k -> $275k ???
Oustanding Loan: $80k
Loan is fixed until Sept 2005

The equity in my Indooroopilly house is locked up until Sept 2005 (due to fixed loan). Thinking about this as I type, I should probably call NAB to ask what the break fees are. My loan was fixed at 6.69% and the equivalent fixed loan is currently at 6.10%

Maybe I should break the fixed loan and make it a Line of Credit? Or maybe half fixed and half LOC?


Anyway, the main question of this post is:

- Should I wait until September 2005 when the fixed loan term expires, then use equity in the Indooroopilly house to buy a property down here (at September 2005 prices). Assuming 5% growth, the properties I like the look of now that are priced at $400 - $600k would be priced $440 - $660k.

- Should I break the fixed loan, refinance it with a LOC, then use the LOC as a deposit to buy a PPOR in Melbourne sometime in the next 3 months.

- Should I look for a lease/option, rent-to-buy, etc, as a tenant/buyer? I realise the disadvantage with this include: paying the stamp duty/conveyancing costs twice (the vendor's built in costs, and then once again upon exercising the option to buy)

Am I nuts thinking of buying a PPOR in Melbourne's bayside for $400k - $600k when I have minimal deposit. Should I look at other eastern suburbs / inner suburbs, in the $300k's

I was thinking house/townhouse, but should I consider a unit/apartment?

I am a self employed consultant, and often work from home. I would consider buying a small commercial property (maybe old shop?) with attached residence. I suppose my company (Pty Ltd) could pay some rent back to me?. A separate outside entrance to the office would be good for tax purposes.

Rough idea at this stage is to live in the proposed new Melbourne PPOR for 5 to 7 years, then rent it out as an investment property.


My financial education (and biases) are based on what I have read
- the Somersoft forum (I've been lurking here since Oct. 2002)
- Money Secrets of the Rich (John Burley)
- Andrew Gray's "Australian Lease Option Handbook"
- several Kiyosaki books, and played the cashflow boardgame a few times


I know there are a lot of issues raised in this post, and some of these questions are kind of like asking "how long is a piece of string", but I'd really appreciate any feedback or suggestions from this sagely group of property investors

Thanks and regards,

mmerlin

 

[Rolf Latham]

Hi

Cant advise on what you should or should not do but an option is to:

Retain the fixed loan and get an additional loan, perhaps an LOC through the NAB.

If the IP is worth 250, then you can get a total loan value of up to 200k. You already have 80 so youre LOC would be 120. Quite enough for deposit and costs on a near 500 k place without mortgage insurance
Ta

Rolf

 

[BorisS]

You will be suprised that because you've locked at a better rate you might actually get a refund from NAB when you break the loan. I had a similar situation with CBA and it worked out quite nicely.

 

[Bear924]

Mmerlin,

The Feb/March edition of Property Investor mag discussed the Melbourne market... perhaps this would be worth checking out. Apart from that I've only been to Melbourne once so I won't comment any more.

 

[Brenda Irwin]

This might help. Your equity is not locked in because of the fixed rate loan. If you purchase another property in Melbourne then you can rewrite the fixed loan or simply leave to run its time. If you prepay then I think there will be a $360- early prepayment fee charged and an economic cost. Economic cost is calculated using the cost of funds to the Bank at the time you locked the rate in compared to the cost of funds to the Bank at the time of breaking the contract. This may or may not bear a direct correlation to the interest rate on the loan. It depends on whether the Bank has trimmed its margin since you locked in (to be more competitive) as this has a beneficial effect an any economic cost. The Bank or Banker should be able to tell you quickly of what the economic cost will be as it only takes one call to find out. The Bank has a general policy of all debts are secured by all properties whereever possible. IE if you do another loan they prepare a POAC (Particulars of agreed changes) to amend any/all existing loan contracts to include the new property as security for all existing loans. This allows them to cross collateralise or total all debts against all security values. Hence you do not wait for loans to mature. They have 3 years at 6.1 at present and this might be what you are looking at. You will need two loans if one is invest and the other PPOR to separate for tax.
Don't know about house prices in Melbourne. Seem expensive but only money after all. Good luck
Les Irwin Brenda let me use her doo dad

 

[mmerlin]

Thanks everyone for the friendly advice.

I contacted NAB and the break fees including "economic costs" are a bit excessive, approx $1700, however, as Rolf suggested, they will write a new loan against a new property using equity in the existing house I have to help get me over 80% LVR.

But there is a serviceability issue. Based on what they have told me I can look around the $300k mark, which will be a step down in lifestyle for me so I need to think more about it. Based on the rent I've been paying for the past 3 years I can service a larger loan, but ah well, gotta keep the banks happy.

So I am now looking for something around $300k in Melbourne, but not so sure I can find something in liveable condition bayside or close to town with 3 bedrooms for that price... time will tell

 

[Rolf Latham]

Hiya

Draw equity from the NAB as possible, then use the lender of your choice for the new property.

Different lenders do different things so I would not be surprised if you could get a 400 k place if you have the equity

ta

rolf