HI everyone,
A noob here
in property and this forum so be gentle Im after advice on what you think i should do… My situation is as follows.
I have a promotion which requires me to relocate to another city, I have a mortgage on my property, It is worth approx $320,000 and i owe approx $240,00
We would like to keep our current home and use it as a rental ,
We want to buy a new home for approx $475,000
I have read up a little on equity and i am a bit confused. I think i have approx $80K in equity correct?
My Questions are:
1. Can i use this 80K as a deposit for the $475K new home that we wish to purchase?
2. Should i roll into one loan or two?Thanks in advance
To avoid Lenders Mortgage Insurance(LMI) a state which the Lender is happier releasing equity you need to be at or below 80% Loan to Value Ratio(LVR). Currently if your property is estimated to be worth $320K and you owe $240K then your LVR is 75% meaning you could comfortably use around $16K of your equity without going over the 80% and incurring LMI. Some Lenders might go higher than 80% to 85% or 90% but the loan process would be more lengthy and stringent and you would be up for LMI
You won't be able to release the full 80% as the bank will only lend up to a certain Loan to Value Ratio (LVR) against the value.
Based on a 90% LVR loan for the $320K property ($288K) would free up $48K in equity and LMI would be in the range of $3,000 – $4,000 (less if you paid LMI initially and stayed with the same lender).
With that $48K equity you could get your $475K new home but would need to be a 95% LVR deal that would be in the vicinity of $15,000.
Remember also that if you can get a higher valuation than the $320K you think it is worth, you will be able to extract more equity from the property.
There are lenders available for both loans that would also include the LMI in the loan so you may not be out of pocket. Although LMI is expensive it does enable you to get those properties.
Definitely keep the properties separate with the loans (ie don't cross the properties) as this will give you more control moving forward. You would want to release the equity as a sparate loan from your initial loan for tax reasons.
Thanks Lincoln, much appreciated.
My wife and i can come up with the $50k coming in the next few months from another investment so we could come up with the money required for deposit if we needed to,
Should i use this 50K as the deposit for the new home, or should i dump it on my current property to decrease the debt on it?Thanks!
The $50K will give you leverage, no doubt about that and can be used if you want to reduce your LVRs and the LMI you would pay. It does also buy you time for your loan repayments if things go awry.
If you are turning your existing property into an IP, then the higher the debt you have against it, the higher the tax deductions you can make in the future. To keep the debt higher and not pay the interest on it now, you can park the $50K in an offset account against the loan (which will offset the interest). That way it is also be readily available for use if you want to put down a deposit on the next property.
Thanks Lincoln!
So i park the 50K in an offset account against the $240K i owe now – then i keep paying off the same amount of money i am now , but the interest generated is less, therefore reducing the primary amount faster? Have i got that right?
If so, come tax time, do i claim deductions on the interest for $240k or $190k ?
Yes that is correct.
Interest is charged on the lower amount and therefore is all you can claim during the year.
Richard Taylor | Australia's leading private lender
Yes, however right now you can't claim anything as you live in the property.
But when you purchase your next property, you can use any offset account against that debt and reduce the interest payable.
The debt against your current property ($240K) will then be tax deducatable and as it is a higher debt, you get a greater tax deductability.
Redlegger,
I would be reluctant to go into that level of debt for an owner-occupier home. It is non deductible.I would do the numbers to decide whether it makes more sense to rent in your new location (you need to balance the emotional side of living in your own home to the financial benefit of renting) and use your funds to purchase another IP.
The use of an offset is an excellent idea and you build your offset up so you have sufficient own funds to make a large deposit and hence reduce your need to borrow non deductible debt. Once you are in that position, then consider purchasing your next PPOR.
However if your goal is to live in your own PPOR, you could use the same lender, cross securitise both properties and not need to put in much funds to settle the new property. A lender will add the 2 properties, $320 + $475k = $795k. They will then calculate 90% LVR (it could be higher depending on lender and your ability to service the loan) = $715k, you owe $240k already. $715 – $240k = $475k, which is the value of your new property. You will need to pay LMI which could be up to $15k or so and stamp duty, but a relatively painless exercise to be able to purchase an PPOR if you do not have much in way of saved funds.
It is not what I would suggest investors do, but it is an option for someone in your circumstances if there is a strong desire to live in your own PPOR and does not want to sell their existing PPOR. It will depend on what you can borrow and what your goals are.
Goo dluck
Greg
in property and this forum so be gentle 
You must be logged in to reply to this topic. If you don't have an account, you can register here.
