Hi Everyone!
I’m new to the forums and also fairly new to property. I am 28 years and bought a house with my wife 3 years ago. Our property is worth $520,000 and we owe $300,000. Our combined incomes are roughly $150,000 per year before tax. We have savings of $60,000.
We want to buy our next house and move into that one. So our first house will become our investment property. We are looking at houses around the $700-750k range.
My question is we have a bit of equity so how can we use it in the best way to borrow for our next house? Whats the best way to set it up?
I do have some ideas but would love to hear some experienced opinions. Thanks heaps!
Hi Pat,
Not a broker so take what I say with a grain of salt.
1. Convert existing loan to interest only so you are no longer paying any of it off.
2. Add the money saved above to your $60K nest egg while you find our preferred new home.
3. Establish line of credit secured by existing investment property. Note this will not be tax deductible as the funds are being used for your new home.
4. Find home and take out loan secured by the new home.Couple of additional comments.
Speak to a broker so check that your current position allows such borrowings.
Try and avoid cross collateralisation of your loans – that is why I proposed the structure above.
It may be prudent to use some of your cash savings to reduce non-deductible borrowings. Weigh this up against the need to retain cash reserves for unseen eventualities. If you retain some/all of your cash reserves place these in an offset account linked to your new home loan.
I would not be adverse to selling you existing home and put the profits into your new home. This will reduce your levels of non-deductible debt. When you have moved in and re-established your cashflows and equity position then consider looking at an investment property if that is part of your overall plan (which it seems to be)
Some will say selling your own home and buying a different property as an investment afterwards will result in additional stamp duty payments – this is true but you'll need to weight that additional expense up against the benefits gained by reducing your non-deductible debt.Hope this helps.
Hi Patrick
Firstly welcome to the forum and I hope you enjoy your time with us.
For a non broker Derek has done an excellent job of illustrating the suggested structure we would implement if you were a client of ours.
Only suggestion I would make is that normally i always try and work backwards for a client to see how we stand.
Let us assume you are looking to purchase a new property for say $750,000 and could borrow 80% without mortgage insurance being applied. This would mean an amount of $150,000 would need to be raised as deposit. (We will assume your $60K savings can be used to cover the acqusition costs).
If we look to refinance your current PPOR and add the existing loan of $300,000 onto the additional amount required of $150,000 this gives us $450,000 against a current market value of $520,000 so just on 86% lvr. LMI would then be charged on this loan and would not be Tax deductible.
Given these numbers you might be better off looking at taking out an 85% lvr without mortgage insurance on the new PPOR loan which would certainly reduce your costs.
The other consideration would be (and we will assume that serviceability can be evidenced to support the new loan) to looking at reducing some of your risk and maybe fixing part of the over lending.
Definately do not cross collateralise the 2 securities as this could cause problems in the future.
Hope this helps. Let us know if you need further information.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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