the use of capital gains

Hi Ryan,

Let me create a few scenarios' that you may be experiencing and answer those, based on that you will find a scenario that fits your current situation.

1. The IP is stand alone and has the loan only attached to the property you are selling – In this situation, lets assume you have a debt of $250,000 against a property that you sold for $400,000. The loan you have against the property is using only the investment property you are selling as security for the loan. After you pay any other associated fees with the sale (sale agent commission, lenders legal fees, lenders discharge fee etc) you will be able to use the net proceeds after the loan is repaid in full to do anything you like with. You may have a tax liability arise from the capital gain you made, but that won't have to be paid until you lodge your next tax return.

2. Your IP was cross collateralized with another investment property – In this case the bank will lend you money and use multiple properties as security against the loan they have given you. This means that if a loan on one property defaults, they can sell any of the properties they have security over in order to satisfy their debt(s). An example of a cross collateralized portfolio would be that you own 2 investment properties that have a current value of $900,000 combined. The loan the bank has advanced against the total $900,000 security they hold is $600,000. That constitutes a loan to value ratio of 67%, In the event that you sell one of the properties for say $450,000, once the selling expenses are deducted from the sale (agents commissions, lenders legals) the balance is applied wholly to the debt against the portfolio. In this case, say the net proceeds from the sale were $430,000, your new debt value would be $170,000 and your remaining property would be worth $450,000 meaning you have a new loan to value ratio of 37.78%. At that point, you would have to apply to the bank for a line of credit against the remaining investment property if you wanted to use any funds "freely" after that.

So in answering your question, if the equity you took from the investment property was from a loan that belonged only to that property, once the debt is paid down in full after the sale of the property, you are free to do as you desire with the surplus equity. However if your property is a part of an investment property pool that is cross collateralized as described in point 2, then any surplus equity will be applied to the remaining debt owed to the bank.

Hopefully that helps you understand a little better as to how banks operate in regards to security used for loans.

Hi Ryan

Short answer is that you'll need to pay off whatever loans are linked against that property.

Cheers

Jamie

Hi Ryan

A couple of other things to address: are the loans on your first property fixed or variable interest?

Is there any mortgage insurance in the equation on the first property?

Why are you thinking of selling?  A decent whack of money goes down the toilet selling down to then buy again (between capital gains tax and reinvesting the cash in another place where you have to pay stamp duty).  It's easier to get ahead leveraging equity as you have done to purchase again.

With your $52k it sounds like it was borrowed against the investment so the bank would want it paid back if the investment was sold.  Depending on if the new property has increased in value at the time you are selling the investment you may be able to keep access to the funds.  Depend on the lender you are with, but also what you are looking to do?Biggest thing to remember is the loan will have to be secured against something, so if you sell the property and haven't got equity in another property to replace it then it will have to be paid back.