Please help as we are new to property investing!
We are a young couple with a baby. We bought a townhouse back in 2001 and rented it out for a few years. We have now been living in it for 3 years and is worth approx $450k. We owe just $39k on it. We want to buy a family home and keep the townhouse because we know it has high rental appeal.
We are unsure what equity is and how we can use this to our advantage to buy our next home. Should we pay off our loan on the townhouse as soon as possible and then just take out a new loan? We could only afford to repay a new loan of $350k with our currently annual salary (not taking into account rent we would then also receive from the townhouse). Do we add potential rental income to our annual salary when working out repayments to determine how much we could indeed borrow?
I look forward to receiving some advice!
Thanks, Pickle
Hi Pickle,
Firstly, Congratulations on being in such a great position. I am sure you will get some excellent opinions off this forum, but remember, as only you know what your goals for the future it wont all be suitable.
So I will have a go and offer my opinion.
As I prefer to have a lower LVR, I do sell when I feel an asset is no longer performing as I would like (dont worry guys that advocate holding, we are only takling singles!!!). As this is your PPOR and no CGT is payable, if you feel there is no significant gain to be had in the forseeable future, would you consider selling it to fund your new PPOR (a non deductible debt) and purchasing an IP elsewhere with greater growth potential (deductible debt)?
If you evaluate the existing property on its rental yield compared to its value (not what you owe) does it stack up as a good investment (remember you get about 7% or better in the bank now).
If it does look like there will be further capital growth, and it stakes up as a viable investment, there may be some merit in putting it into a trust so the debt is deductible (it will trigger stamp duty so you will need to consult an accountant)
You also have the option of renting your PPOR, retaining its PPOR status for up to 6 years, all expenses become dedutible and renting yourself elsewhere.
Which path?? It depends on what your goals for the future are, and running some numbers to check out your prefered scenarios.
All the best, you are in the box seat.
MickOpps, sorry, I have just reread and see that it started off as an IP. So that will mean not all of your gain is tax free if you sell. Again, have a go at running the numbers for each scenario, see with each where you will be in now, 1 year and 3 years and then it will be more clear which strategy suits your family's goals
MickHi Pickle.
You don't have much left on your loan, but you should stop paying it down – change to interest only. This is because you will be able to claim the interest on this loan as a deduction when you start to rent it out – won't be much, but everything helps. You can then use the money you would have used on the current home to purchase the new home and have a lower loan on that – which won't be deductible.
You can use the equity in your current home to assist you into the new one. There are 2 ways:
1) use your existing home as additional security for the new one
2) borrow a bit more on the existing home and use this as deposit for the next one.2 is preferable as you don't have to use the same bank, it is less risky if you default, and less problems if you decide to sell one. Make sure you have a new split too because only the existing loan will be deductible and you don't want to mix business and pleasure in the same loan.
Banks will take into account the rent you can get from your existing one (usually 80%) in addition to your incomes.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Ok. You could refinance with your current bank / institution.
If you already have a $39K loan with them, you might want to extend that loan on your townhouse to $389K.
This will give you $350K cash in your hand, and a new debt of $389K on your townhouse.
Enquire about an offset account… You may be able to pay a little extra now for the facility of an offset account…
Therefore if you leave that $350K in the offset, you wouldn't have to pay interest on that amount…
I can't see many banks offering this feature for obvious reasons.. but some do.So then…
You have a $389K debt… and $350K CASH deposit for your new home.So say you purchase a home for $600K… then you would have:
– House worth $600K (loan of $250K)
– Townhose worth $450K (loan of $389K)
Your accountant will also remind you that it pays to pay off as much of your PPOR first, then have all the debt on the townhouse (as you can claim the interest on the investment property, but not on the PPOR).When refinancing bank remember that you will need to borrow less than 80% ($360K) of the principle (450K) to ensure you don't pay LMI (Lender's Mortgage Insurance).
Either way… as "NEWBIE 2" mentioned…. Congratulations on your success so far… It's a great position to be in and a great problem to have
Once you have paid down an IP you are not able to reborrow and claim the interest on this new loan as a tax deduction, unfortunately. Only the interest on the lowest amount ever owing is claimable, but as always, confirm this with your accountant as I am not professing to be one.
Many thanks to you all for your advice – this is a great help! We will be meeting with our accountant this coming week. We think that it is definately worth keeping the townhouse as our neighbours in a similar townhouse are currently paying $350 p/w in rent. It is 20km from Melbourne cbd, 10 minute walk to train station, 5 minute drive to beach and 2 minute walk to shopping centre, so we feel optimistic it can be a viable investment over the longrun. Does it mean that by restructuring this loan back up to the $389k as you suggest we can negatively gear the property?
One question for newbi2 – was does LVR mean?
Many thanks,
MichelleHi Michelle
Regretfully not Does it mean that by restructuring this loan back up to the $389k as you suggest we can negatively gear the property?
This is only possible if the property is sold to another entity i.e Trust structure or similar.
Richard Taylor | Australia's leading private lender
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