Hi,
I'm looking for some advice on purchasing a new home. My current situation is as follows:
I have an investment property valued at around $550,000 with $340,000 owing on what is now an interest only loan.
I also have a unit which is my current primary residence and is valued at around $420,000 with $305,000 owing on a principal and interest loan.
I am now looking to purchase a house as my new primary residence for around $550,000 and am wondering what the best strategy would be.
I am interested in growing my property portfolio so my preference is to turn the unit in to an investment property but I realise that most of my savings is in equity and that this would make the new non-tax deductible house loan 100% of the purchase price, and leave the two investment loans partly paid off which doesn't seem like the best outcome.
What would be the best option?
– Turn the unit in to an investment property with an interest only loan and use the equity from both current properties to purchase the new house.
– Sell the unit to purchase the house.
– Sell the duplex to purchase the house and turn the unit in to an investment property with an interest only loan.
– Sell both the unit and the duplex to purchase the house.
I live in NSW.
Thanks
Hi S Drake
If you think your current unit would make a good investment then I'd be inclined to hold onto it.
The LVR isn't too low – so by converting that loan to interest only now, you'll be able to claim a decent chunk of interest when it becomes an IP.
How much are you looking to spend on your next PPOR?
If you do decide to hold onto your current PPOR (and turn it into an IP) you need to be careful when accessing equity to cover the next PPOR purchase. The equity release needs to be set up as a second split so you can identify your deductible from non-deductible debt.
A decent broker/banker will be able to assist. A not so decent one will make a mess of this.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi SDrake,
While you have looked very carefully at the equity side of your equation have you also considered the cashflow side of your current situation?
What rent are you receiving on your current property?
What rent would you receive on your unit if it was rented? and
Finally does your income sustain additional PPOR borrowings – if so, at what levels?
Need to consider this side too as while everything may be affordable now – what happens when interest rates rise?
Making decisions on the basis of current interest rates, when they are at long term lows, is not a a wise move. Make sure you stress test your cashflow situation too.
Thanks Derek, cashflow is very important but I am comfortable with calculating that part of the equation. FYI, I receive $450 per week for my current property and expect to receive $380 per week if the unit was rented which is a conservative estimate based on similar rentals in my area.
Hi Jamie,
Thanks for your response. The LVR on the unit alone is at 72% but I also have equity in the duplex and when combined, the LVR is at 66% with a total of $345,000 in equity which isn't a small chunk of change and could go a long way to reducing a non-tax deductible primary residence loan. At what point is the LVR considered to be "too low" that you should consider selling?
I'm looking to spend $550,000 on my next property. Splitting the loan isn't an issue, I've done this before and am familiar with releasing equity so you can identify deductible from non-deductible debt.
Cheers
Sam
sdrake wrote:a total of $345,000 in equity which isn't a small chunk of change and could go a long way to reducing a non-tax deductible primary residence loan.This comment implies you are considering using the equity available in your current properties to reduce the loan required on your new home. Is this correct?
If this is the case then there is no financial advantage to this part of your plan. Because the funds are being used to buy a new home then there is no deductibility of interest allowed. The ATO considers the purpose of the new borrowings to determine deductibility – not the type of security used.
sdrake wrote:At what point is the LVR considered to be "too low" that you should consider selling?Low LVR means lots of equity and proportionally low debt level. Not sure why you would sell.
Hi Sam,
Sounds OK – don't forget to consider the mortgage repayments on your new property when doing your calculations.
I say do the sums and work it out.
Selling and then using the funds will assist in reducing your non deductible debt considerably. CGT could be avoided on the main residence probably so just agents fees and legals. Work out CGT on the other and then work out total costs of selling and how much money you will save in non deductible interest pa.
Then make an assessment on whether to sell or not.
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
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