Hi I was hoping to get some advise on my situation.
I currently have three investment properties. Over the past few years we have paid off our loans on them. What I was wanting to know is if we are able to use the equity from the investment properties to buy a home. If we were to put all our loans back up to 80% of the property value we would have around $300000 – can we use that money to buy a new home to live in? What I am trying to achieve is having no mortgage on our home and having 80% loans on all our investment properties. How do I go about achieving this?
Any advise would be appreciated
Thank you
Hi Judith, You can’t just increase the mortgage on your rental property and have it continue to be tax deductable. The purpose of the loan must be to purchase an income producing asset. The only way you will be able to end up with full ownership of your PPoR and all debts deductable is to sell one or two of your IPs. You could then purchase your PPoR with what’s left after all the selling costs and Capital Gains Tax. You’ll then have good equity to borrow for new IPs. The ATO takes a very dim view of anyone trying to up their rental mortgages to fund private purchases.
If you really want to keep the IPs and buy a new home, then you’ve no alternative but to borrow with a non-deductable PPoR loan. It would probably have been better to keep all the IP mortgages Interest Only and save all your principal payments you would have made in an offset account to fund your PPoR.
JDoogs is right and it’s a common problem. Were any of these investment properties previously your own home?
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MelHi,
Doogs makes a very good point re: interest deductibility.
However, here’s one possible strategy you might like to discuss with your financial adviser…
Instead of redrawing 100% of your home’s purchase price against equity from investment properties, just:
1. Set up a new loan for ?%LVR you need for your home. Note that this interest will not be deductible.
2. Fund the deposit and closing costs from a redraw of equity from your investment properties. Again, the interest on the redraw will not be deductible.
At least this way you keep available equity (through your investment property) to use on any other investment assets that you might want to buy in the future instead of tying it up with the puchase of your home.
Of course, with borrowing money comes financial risk that should interest rates rise you’ll need to cover the higher repayments.
Regards,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Thank you for your responses – I realise now that paying off IP so quickly is not always the best thing. However, I know that by selling off 2 of the three IP we will be able to buy our home and then start again with further investment properties – all is not lost!!!
Melanie – We have never lived in any of our investment properties. And we have never purchased our own home.
Instead of plugging money into our IP mortgages – what would you suggest we do with our savings???? At this point in time we are able to pay off a huge chunk each month as our expenses are down and our IP are our only loans. I know buy not paying our mortgages off it will be better for Tax Deductions. I suppose we never something that will yeild more than we pay in interest rates.
Any suggestions?Alternatively, buy you new home within a trust.
The interest will be tax deductable although
you’ll have to pay market rent to your trust
for the deductability to stand up.Also you’ll lose CGT exempt status but if you
plan never to sell, or to move and turn the
new property into an IP in the future then
this disadvantage is reduced.andy
I know buy not paying our mortgages off it will be better for Tax Deductions. I suppose we never something that will yeild more than we pay in interest rates.
Any suggestions?
Hi again Judith, as I wrote earlier, an offset account is a nice place to park your excess funds for a while, but remember that your are only saving tax deductable interest if the loans are for your IPs. This effectively reduces the “investment” in your offset account to about 3% after tax. If you end up with a loan for your PPoR, then it’s a different story of course. Your investment in paying off the principal for that loan will be 6% after tax (ie the full interest rate of your loan) (I’ve used 6% because I’m paying 5.97%)Just another thing: I wrote principal for your PPoR, which would be equivalent to an offset account against the loan for your PPoR, except for one important thing: If there is any chance you might wish to change your PPoR into an IP in the future, then keep your PPoR loan Interest Only for as long as possible, with what would have been principal payments going to an offset account. Same reasons as I’ve posted above, and just about everywhere else!
PS all you mortgage brokers out there: How easy is it to get an IO loan/100% offset account combination for your PPoR (or any property for that matter)?
JEasy – ANZ, CBA, Rams all offer it in their O/O products, more offer it for R/I products, may reduce the LVR from 95% to 90% though in some cases.
Cheers,
Mel
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