I own a property with $315,000 mortgage, valued at $525,000.
I have been wanting to move to a different part of my city, for lifestyle reasons, and unexpectedly, before I was really ready, found a place in my price range and desired area. I did the sums, saw my accountant to be sure I could afford it, and put it an offer. I figured I'd rent my existing place out. My bank said they'd lend me the money based on equity in my existing home.
It seems there is so much more to this than I realised?
Is the loan my bank has recommended the best option?
What are the tax implications?
What else do I need to know?
Here is the situationL
My property – $315k mortgage, valued at $525k
New property – $565k purchase price
My savings – $20k
My income – $150k
Rent (prospective) on existing property – $380pw
My bank has recommended I get a combined loan of $925,000 (original $315k plus $610k to cover new property) at a variable rate of 6%.
My account has said I should split the loan – keep the $315k loan as is, and switch to interest only.
Is this an okay plan? I am okay with the repayments, but am worried I am making a mistake with the loan or tax.
Thanks for reading this far!Richard TaylorParticipant@qlds007Join Date: 2003Post Count: 12,018
Got your email and responded accordingly.
Have to say your Accountant is correct and would listen to him every time over your Bank,
The way forward is a split loan using the current property as security merely to fund a 20% deposit and sufficient to cover acquisition costs.
The new loan on the new PPOR should be kept separate without using the security of the existing property at all.
There is much more to this than merely a quick cross consolidation with the same lender (although Bank West won’t agree with me) however if course is time of the essence then probably don’t have much choice.
It is for this very reason I suggest to clients to be planning this before they go to Contract as getting it right takes time.
Oh and finally at 6% for that size loan your current lender isn’t doing you any favours.
It is about par for the course although as I mentioned in my email interest rate is merely 1 peace of the overall lending puzzle.
Yours in Finance
Thanks Richard, I appreciate the advice.
Yes, I can see that a planned out strategy would be preferable in every way!
I am not sure what, if anything, I can do to improve the situation now – I certainly don't want to be signing up to a loan that isn't the best one for my circumstances, so I will ask the Bank if there is another way and explore other options.
RachelmattstaParticipant@mattstaJoin Date: 2011Post Count: 604
i also suggest against a combined loan.. that's a bad idea.. puts you in more riskYour BrokerParticipant@your-brokerJoin Date: 2012Post Count: 22
I would agree with Mattsta it is not always best to have these loans cross colaterised. It maybe best to speak to a broker as your bank is always going to tell you it's best to have all your egg in one basket (theirs!!) Talking to a broker about what you plan to do can save you time and money down the track.
A common problem people are seeing with cross colaterised loans and the recent decline in property prices when they go to sell one property they do not get all the proceeds of the sale as the bank wants to revalue the remaining property and retain more of the funds due to it's decrease in value. You wont have your bank tell you that.
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Great advice in this thread – thanks everyone who's taken time to respond. Learned more in 24 hours than ever before in my life!Ephraem1Member@ephraem1Join Date: 2012Post Count: 17
+1to mattsta, It is generally considered safer to take out separate loans on properties and not to cross collateralize. This way, in an unlikely worst case scenario, if a lender was to repossess the house it can only touch one house as the other is independent.
@your Broker: +1! the banks definitely recommend to cross collateralize since then they get more interest obviously, but it's for their benefit and not necessarily in your interest