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How to enter a loan that is secured by one asset and financing another asset (e.g. home equity loan)

Some common situations where you may wish to model a loan that is secured by one asset and financing another asset are:

  • Using the equity in a family home to buy a new investment property

  • Using equity in an investment property to invest in shares

General rules of thumb for data entry

  • Enter items in the following order:

    • Existing assets

    • Existing loans

    • New assets

    • New loans

  • For loans:

    • Add loans to the financed asset, not the securing asset. This makes sure that the Financing field is filled in for you.

    • Make sure that the Financing field and the Secured by field (in the 'Special financing' section) have the correct assets filled in

    • For new loans, you can control how much to borrow using the fields in the Special financing section. There is help text under each field to help you.

  • For assets:

    • Check the Loan to value ratio % field is correct on the securing asset because this affects how much can be borrowed against the asset

    • If it is an asset that will be purchased, also check the fields in the Special financing section to help control how much can be borrowed to purchase the asset. There is help text under each field to help you.

  • For new assets and loans:

    • If there are multiple restrictions on borrowing, Pathfinder will adhere to the lowest number and will not violate any restrictions. For example if you have set the borrowing on a the home equity loan to be no more $100,000, but the available equity in the securing property is only $50,000, Pathfinder will not borrow more than $50,000.

  • If you have multiple loans financing one asset:

    • If the interest rates are different, Pathfinder will typically prefer the loan with the lower interest rate. If you don't like this, you can place more restrictions

    • If Pathfinder borrows too much on one loan and not enough on the other loan, then place more restrictions on the loan that is borrowing too much.

Relevant fields to fill in with examples

This is an overview of the key fields that need to be entered for each item.

Item to add

Fields to pay special attention to, so that borrowing is accurate

Example 1

Buy a new investment property where:

  • 80% of the value can be borrowed against the property itself

  • The 20% deposit and 5% acquisition costs are borrowed against an existing home.

  • The existing home also already has an existing mortgage, and it's possible to borrow up to 75% of the property value 

Example 2

An existing property that is financed by a loan secured by an existing home

1

Securing asset (asset 1)

  • Property value $

  • LVR

At the Current situation > Assets & loans step, add the existing family home, and fill in these fields as follows:

  • Property value $: $1,000,000

  • LVR: 70% (this limits the total borrowing that can be made against the property)

At the Current situation > Assets & loans step, add the existing family home.

2

Any loans that are are also financing the securing asset

  • Financing

  • Balance

At the Current situation > Assets & loans step, add the existing family home mortgage (You can do this once you have added the home by clicking the Add loan financing family home button under the 'Family home' main form, or by clicking Add loans > Secured loan (left menu)).

On the existing loan, fill in these fields as follows:

  1. Financing: Family home

  2. Balance $: $400,000

  3. Secured by: Family home (this will be filled automatically in when you fill in the 'Financing' field, so you just have to leave it)

At the Current situation > Assets & loans step, add the loan secured by and financing the family home.

3

Financed asset (asset 2)

  • Maximum % of asset funded by loans

At the Cash flows & Goals > Review assets & loans step, add the new investment property and pay special attention to these fields:

  1. Property value $: $500,000

  2. In the Special financing section, edit the Maximum % of property funded by loans field: 105% (i.e. 80% loan against property + 20% deposit + 5% acquisition costs)

At the Current situation > Assets & loans step, add the investment property.

4

Loan that is financing the second asset and is secured by the first asset

  • Financing: asset 2

  • Secured by: asset 1

  • Special borrowing options

Underneath the new investment property, click the Add new loan financing property and pay special attention to these fields:

  1. Name: New property mortgage secured by home

  2. Financing: New investment property (this is filled in for you because you clicked the Add this loan to this asset button.

  3. Secured by: Family home

  4. Special borrowing options > Set maximum as % of financed asset value: Fill in 25% (i.e. 20% deposit + 5% acquisition costs)

At the Current situation > Assets & loans step, add a loan and fill it in as follows:

  • Name: Property mortgage secured by home

  • Financing: New investment property

  • Secured by: Family home (this is in the Special financing section)


5

Normal loans that are also financing the second asset

  • Financing: asset 2

  • Special borrowing options

Underneath the loan you just added, click the Add new loan financing property again, and pay special attention to these fields:

  1. Name: Property mortgage secured by home

  2. Financing: New investment property (this is filled in for you because you clicked the Add this loan to this asset button.

  3. Secured by: New investment property (this will be filled in by default, so you don't need to change it)

  4. Special borrowing options > Set maximum as % of financed asset value: leave as 100% (since we've already placed a restriction on the other loan, we can leave this optimise)

At the Current situation > Assets & loans step, add a loan and fill it in as follows:

  • Name: Property mortgage secured by home

  • Financing: New investment property

  • Secured by: New investment property (this will already be filled in, so you don't need to change it)

6

Comments on modelling for the examples


We can double check the data entry to see what the maximum allowed borrowed will be.

Limitations for borrowing set on loans

For the 'Property mortgage secured by home' there are two restrictions, and Pathfinder will borrow no more than the lower number (i.e. $125,000):

  • Borrowing specified on loan: On the 'Property mortgage secured by home', according to the 'Special borrowing options' field, a maximum of $125,000 can be borrowed to finance the property (i.e. property value x Maximum borrowing as % of financed asset = 500,000 x 25%)

  • Available LVR on home: According to the home LVR and existing loan balances secured by the home, a maximum of $300,000 can be borrowed against the family home (property value x LVR - existing loans = $1,000,000 x 70% - $400,000).  However, since this is higher than the $125,000 in the previous point, only up to $125,000 will be borrowed.

For the data entered for 'Property mortgage secured by home', a maximum of $400,000 can be borrowed:

  • (Property LVR) x (Property value) = $500,000 x 80% = $400,000.

  • On the loan, for the 'Special borrowing' options, robot was chosen, which essentially means it isn't placing additional restrictions.

So according to the limitations on the loans, the total that can be borrowed is $525,000 (i.e. $400,000 + $125,000)

Limitations on borrowing set on property that is being purchased

If we look at the property that is going to be purchased, the maximum that can be borrowed across all loans is $525,000 (i.e. property value x Maximum borrowing as % of financed asset = $500,000 x 105%)


Compare borrowing set on property and loans

Since the limitations set on the loans match the limitations set on the property, Pathfinder will borrow up to $525,000.  If the numbers didn't match, then Pathfinder would adhere to the lower number.

During data entry, if any data are inconsistent, you'll get an error. For example, if the property LVR is too low to cover the property balance and outstanding loan balances, you will get an error and you will need to correct it by changing one or more fields before you can solve.

Since all the loans are already existing, you just need to set your preferred repayment options at the Cash flows & Goals > Review assets & loans step.

Troubleshooting

If you have a new loan that is secured by one asset and finding another, and the loan isn't borrowing any funds, then some things to check are:

  • Check errors and warnings at the Results > Solve step, in Step 1

  • Check errors and warnings in the Solve events, when you click solve

  • Check the property securing the loan has a non-zero 'Loan to value %' ratio. If it isn't zero, then also check that there is available equity in the property. For example. if the securing property has a value of $500,000, and you have set the LVR to 80% and there is an existing loan of $400,000, then the available equity is zero (i.e. ($500,000 x 80%) - $400,000 = 0). So, no more borrowing can be made against the loan.  If it's feasible, you can increase the LVR on the property.

  • On the property that is being financed, check the 'Maximum % of asset funded by loans' is non-zero.  Usually, it is okay to leave this field as 100, because you will restrict the borrowing on other fields.

  • If the loan is funding shares, and you want to allow borrowing in multiple years, then make sure that the 'Home equity loan' field is set to 'yes' (if it is a proposed loan, please Contact Optimo Financial and we can do this for you)

  • Review the steps outlined in this help page, to check if you missed any field. You may find it helpful to follow one of the examples that is similar to what you are trying to model.

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