I am a single parent needing to move. I have had the care of young children and not worked for a while, but hope to upskill and find some part-time positions soon. My income at the moment is mainly FTB and child support and rental of an IP. I own my PPOR outright and the IP is worth $400K, currently rented out at $350/week.
I am thinking of selling my PPOR for $750K, so I can buy another cheaper property to live in. Is it a better option to rent it out (it would get $550 nett a week) and borrow against the equity in the home? But the loan would be for my next PPOR and the interest on it wouldn’t be used for calculations in property losses if I rented out my current PPOR, would it?
Thanks for any help or ideas. I still have young children but my earning capacity for the future is limited.
Kris
Hi Kris,
You are going to be hamstrung by limited/compromised borrowing capacity and on this basis alone I would be reluctant to take out a new PPOR loan. While your rental income will increase this would be offset against a jump up in your non-deductible debt.
Having said that from an asset value point of view you are well placed – albeit your income level may be contraining you somewhat.
Is there a reason you are thinking of moving your home?
To me this is the key issue and the correct course of action may well be hidden underneath this reason.
Thanks for your response, Derek. I need to move to escape a bad/violent situation as my ex has moved nearby.
The reason I was not too fussed about the non-deductible debt is I already have a property loss that is carried over (due to the fact I couldn’t use it to reduce my taxable income as I haven’t worked).
I feel reluctant to sell because of selling costs, and the general wisdom of buying and holding. I don’t want to jeapordise my future or my children’s assets in the future because my income is limited so I need to be wise about my assets. But if it is not an option to hold, or rather not that attractive an option, then I don’ feel so bad selling a sizeable asset and moving on.
The other thing I don’t know if I should consider is the fact that my current residence is unlikely to gain very much in the short term as it is a higher priced asset for the suburb, and yet not in the category of a million dollar property. It certainly hasn’t gone up in the past 4 years. So if my debt increases but the equity doesn’t, then I guess that’s not a good scenario.
KrisL wrote:The reason I was not too fussed about the non-deductible debt is I already have a property loss that is carried over (due to the fact I couldn't use it to reduce my taxable income as I haven't worked).If you are not careful with property selection you may find yourself in a situation where your accruing losses keep on accruing. From a cashflow perspective you would be better off looking at the whole situation. That is what happens if you do/don't sell your existing home to your cashflow. Rather than just looking at each of your properties separately also look at them in total. You may find what one takes away the other gives and vice versa.
Quote:I feel reluctant to sell because of selling costs, and the general wisdom of buying and holding.Selling costs can be a pain in the backside and you would need to get some accurate details on what exactly you would be up for. I often find people cite 'being afraid of selling costs' without actually knowing the dollars involved.
Quote:I don't want to jeapordise my future or my children's assets in the future because my income is limited so I need to be wise about my assets.Adding more non-deductible debt would be a hinderance to this aim. You may be better looking at a sell off, re-purchase and then invest option if you are able to sustain any further borrowings. Given the information provided to date I would suggest this would be extremely unlikely. Find yourself a broker to chat with as knowing your borrowing capacity will be to your advanatge as you start fine-tuning options.
Quote:But if it is not an option to hold, or rather not that attractive an option, then I don' feel so bad selling a sizeable asset and moving on.Moving on is sometimes good for the sole. Having said that I get a sesne that you still need to crunch some more numbers and find out some more facts.
Quote:The other thing I don't know if I should consider is the fact that my current residence is unlikely to gain very much in the short term as it is a higher priced asset for the suburb,Most expensive property in the street are always an issue. Ceratinly it may be some time for you to regain true value in your house. Couple this with the emotions of the area maybe a clean break is most beneficial. But as I said earlier do some detailed maths – see if you can find someone who is a good property strategist/divergent thinker and is able to listen to your point of view.
All the best with it
Thanks, Derek. Just one last question.
Since my PPOR is not mortgaged, is it not possible to take out a loan on it (although the original loan is not line of credit) and therefore the loan will be against it instead of the new property which will be my place of residence? I thought that was what equity loans were about.
Kris i dont think Derek was disputing the fact that you can mortgage your own PPOR what i believe he was commenting on was that you would have limited serviceability in your position.
Remember where the loan is solely relaint on rental income lenders are down reducing considerably the amount of rent they will use in their serviceability calculation.
I havent seen this since the mid 90's when i first arrive in Oz but there are a lot of things changing in the finance world daily at the moment so nothing is now suprising me.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Agreed Richard. I think it’s taking a turn for the worse.
Definately agree Aaron.
If the level of enquiry from clients saying "my current lender has just declined my loan, can you help" is anything to go by it is only going to get worse and worse.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Definately agree Aaron.If the level of enquiry from clients saying "my current lender has just declined my loan, can you help" is anything to go by it is only going to get worse and worse.
Hi Richard- Interesting comment. Are you seeing the domestic credit market tightening possibly due to the Greece default? And it sounds like you think this trend will continue and credit will get harder to get?
Cheers,
LukeThanks, Richard.
I thought Derek said that the new loan (for another PPOR) would be nondeductible because it would be for me to live in (which was my original question). I was trying to confirm if the new loan can be against my current home which has no mortgage on it, it will be tax deductible because I will rent out my current home. Apart from the rent from my current home, which is estimated to be able to rent out for $550/week, I also have the IP which is being tenanted at $365/wk so I don’t understand why a lender would find it hard to justify lending when the new PPOR I am looking at is $500 K (including purchasing costs), which, at 7%, is $670/week. Maybe banks think I need a lot to live on, even though I have managed to survive with 4 kids on government payments and child support.
I guess Derek is right that cashflow is always going to be a problem, which I was hoping to ignore if I could let the interest capitalise and count on the fact that equity will increase faster than the debt – in the long run. I have calculated by real estate agent fees (advertising and commission) to be about 10K so I guess I should just bite the bullet and be prepared to lose that and start over. Maybe I can approach lenders at a better time when the credit market softens, or when I am more able to service the loan.
Kris
Security for the loan is irrelevant. If you secure the loan on an investment property to buy a new PPOR then the interest won't be deductible.
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
Hi Kris,
Been up to my armpits painting – sorry about the delayed response.
Richard has confirmed what I suspected you will not be in a position to borrow for new home. Not being a broker keeps me out of those ever finance changing loops.
Given this the only option you really have is to 'sell up' and use the proceeds to buy a new home outright.
I don't recall seeing any reference to mortgage or security considerations on your IP. If there are second mortgage/security type issues with any loans that may be in place make sure you can retain all funds from your property sale without having to use any to clear existing debts or security.
And our resident tax man Terry has clarified the loan/security/tax issue.
Hope the picture is a little clearer for you now.
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