Friday 2 December 2022

Applying for a mortgage 'pre-approval'

The 'off-the-plan' one-bedroom apartment I contracted to purchase back in 2019 has now completed construction. I have the 'final inspection' scheduled for 17 Dec, during which allotted 30 minute  period I'll have to go through a check-list to try to identify any 'defects' that the builder *should* rectify before settlement (which will happen sometime in January). I had intended to pay ~$200 to get an inspection done by a registered building inspector, but the company I contacted for a quote said they couldn't do it within a fixed 30 minute appointment window (they probably won't take more than 30 minutes, but probably just go from one job to the next and can't guarantee to arrive at a fixed time). Hopefully everything is working OK and the apartment floorplan ended up as advertised, and the finish it to a high standard (I would hope so, given the unit cost $1 million!).

I initially paid a $100K deposit back in 2019 (plus the $42K state 'stamp duty' tax), so I'll need $900K to pay the vendor at 'settlement'. I have about $100K in my bank account (I sold some shares earlier this year), so I need a mortgage for the remaining $800K. I could use my (and DWs) existing 'portfolio loan' line of credit (that is secured against our existing home equity), but the interest rate (7.53%) is considerably higher than I'd pay on an investment property mortgage loan (5.29%).  So I'm applying for a 30 year variable rate loan, with 'interest only' payments for the first five years. Preliminary calculations by the bank's mortgage officer indicated that we have to reduce our current 'liabilities' by around $400K to meet the bank's lending criteria. This is largely due to my having unused credit limits on several credit cards (which I don't use, but like to retain as an 'emergency fund') and a large credit limit on our portfolio loan. As we only have a small amount currently taken from on the portfolio loan.(about $80K with a credit limit of $880K), we will apply to reduce our portfolio loan credit limit by $400K so I can get the new mortgage pro-approval passed.

Based on some rough calculations, the apartment should end up costing me around $100 per week 'out of pocket' (after taking into account the tax savings due to negative gearing), which I can easily fund doing a couple of Door Dash  sessions each week. The rest of the repayments and costs during the five years of 'interest only' payments should be covered by the rental income. Hopefully rents may have risen sufficiently over the next five years so that I will be 'neutrally geared' by the time the loan reverts to 'principal and interest' payments (which will be about 20% higher than 'interest only').

If mortgage interest rates rise, I'll have to find some additional cashflow (eg. by reducing my current automated savings plans, or eliminating salary sacrifice into superannuation). Every 0.5% rise in mortgage interest rates would add another $77 per week to the required repayments.

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