Hi, we have a house in Shailer Park , South Brisbane and have about $150,000 equity. We need to buy a bigger house with one in mind about $550,000 in Ormeau, Gold Coast Shire. Is it better to use equity for deposit on new house and rent current property or sell where we are and then look for bigger house? Any advise would be greatly appreciated. Thank you.
If you use the equity in your current PPoR as a deposit on the new PPoR, and then get a loan for the balance of the purchase price, the interest on that loan is NOT tax deductible as it is not being used for investment purposes.
You will be up for repayments on $550k plus costs (usually around 5-6% of purchase price). Total loan of approx $580k.
Assuming the loan is interest only, and the interest rate is standard market rate of about 7.5%, your interest payments alone will be around $43,725 per year; $3,643 per month. Ouch.
You would do better to rent out your current PPoR, and rent the house you need in the area you mentioned. All the holding costs on your PPoR will become tax deductible, while the rent you will pay on a nice house in the area of choice would be a lot less than a mortgage repayment I suspect. Use the equity from your current PPoR to buy further I.P's. Most people are averse to this strategy becuase of the strong emotional attachment of living in your own house.
Or, sell the current PPoR and use the profit as a deposit on the new house. Then you can redraw the equity from the new PPoR for investing, which does carry tax deductions on the holding costs and the loan. The problem is you will eat up a fair proportion of your profit from your PPoR in selling and buying costs to acquire the new PPoR.
Yes its a bind many fall into and the reason more people are using Mortgage Advisers to structure their loans correctly in the first place so that if there is a change of purpose for the property it has minimum effect
HI knovak,
Thanks for your post. I’m not sure about the notion of having your old house become an investment property just because you used to live in it.
It sounds to me, unless I have misread your post, that you are thinking along these lines for the sake of finance convenience rather than investing merits. If I’m wrong then apologies for the error.
Remembering that any profit on your PPoR should be tax free, and given that you are moving, what is the disadvantage of selling other than sales costs?
Perhaps it is a good time to set and establish an investing plan that includes a time and money goal, as this will give perspective to your property investing. Also, it is critical that you do the numbers.
For instance, I would expect renting your home would be quite -ve cashflow. Adding this to any non-deductibe extra debt (???) on the basis of your home upgrade, you might suffer quite a drop in cash in your pocket.
If you don’t know how to do the numbers, be sure to see an accountant to help you create a financial model.
Cheers,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
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