Borrowing more than you need is a common strategy among property investors as a way to maintain their cash flow and take advantage of further investment opportunities.
What do banks think when you don’t want to use all of your home loan funds right away?
Do I qualify?
- Yes! You can apply for a higher loan amount than you actually need in order to purchase an investment property.
- You will need to be able to show that you have a strong financial position to afford the new loan amount and have a clear credit file.
This is quite common with an equity release home loan where you’re still looking for an opportunity or you’re keeping funds aside for cash flow purposes.
Later on, you can either reduce the loan amount or repay the loan entirely, if the higher loan amount has been drawn down.
Call us on 1300 889 743 or enquire online and find out how you can access equity in your property.
What if I’m buying a property to live in?
If you’re buying a property to live in (owner-occupied) as opposed to an investment property, it’s only possible to borrow more than the property value if you’re applying with a guarantor.
- You can borrow up to 105% to cover the costs of purchasing the property including conveyancing fees and settlement costs.
- You can borrow up to a maximum of 110% to consolidate existing debts.
- You need to provide evidence stating your intended purpose for the extra funds.
What are the benefits of keeping unused funds aside?
- You don’t have to apply for a separate equity release loan in the future.
- You can put the extra money towards future investment or to make capital improvements to your home or investment property.
- You can give yourself a savings buffer so you’re in a better position to handle sudden changes to your financial situation or a rise in interest rates.
What are the drawbacks
- You may have to pay a certain percentage as a fee for the unused funds if you haven’t used the funds for at least 6 months.
- You’ll be pay a higher interest rate for the idle funds.
- Your ability to borrow additional funds in the future could be difficult depending on how much extra you borrowed for the home loan.
Tips on unused home loan funds
If you keep unused loan funds in a 100% offset account, then banks will not charge interest on that portion.
For example, let’s say you have a $600,000 home loan at an interest rate of 3.59% per annum and you’re making principal and interest (P&I) repayments.
You have $20,000 in savings that you decide to keep in a savings account.
Your P&I repayments will be $2,725 per month.
However, if you were to put that $20,000 into an offset account, you would save almost $37,000 over the life of the loan.
In this way, you could pay off your home loan much quicker as you’ll be paying more of the principal component compared to the interest.
Getting the most out of unused construction loan funds
Construction loans are released in 5 or 6 progress payments.
What’s great about a home build loan is that interest and repayments will only need to paid on the amount used so far.
For example, if you’ve only used $100,000 on a $300,000 construction loan, you only have to start making principle and interest (P&I) payments on $100,000.
You won’t have to make repayments on the remainder of the funds until construction is complete.
That means you can use this time to get ahead and make extra repayments or put some savings aside into an offset account to buy furniture and to get your home set up.
Are there alternatives to keeping unused funds?
Ultimately, that would depend on your investment plans.
If you plan to invest for the long-term, rather than the short-term, you may want to just borrow the amount you need, pay down your home loan as much as you can, and grow your equity.
Then you can merely top-up your home loan to use as a deposit for another investment or cross-securitise your home.
Speak to one of our specialist mortgage brokers on 1300 889 743 and we can help you qualify for a home loan increase without any charges.
Thinking about investing?
We’ll carefully assess your situation and what you’re looking to achieve.
In that way, you can maximise your cash flow and reduce your interest bill.
If you’re looking to borrow a little more for investment purposes, call us on 1300 889 743 or complete our online enquiry form.