What happens when you sell a house that you used for equity?

– Bank will make you repay some proceeds from house into House B to ensure their LVR ratio is kept

– Take out 2nd loan on Property A, Can be called Line of Credit.

– Use this as deposit on property B

– Take out 3rd Loan on Property B (Line of Credit + New home loan for new property)

Just need to make sure total loans over house A will be paid out from disbursed funds from the sale of same house. If not enough you will have to come up with the difference. 

Why do you need to sell house A?

Depends how you have structured it.

If cross collateralised, the one loan will be secured by 2 properties. so you will need to gain the lenders permission to release the sold property. This generally won’t be a property if you are releasing the investment property secured by your PPOR – usually the release won’t effect the loan on the PPOR.

But imagine you have a PPOR and then use this to borrow 105% for the investment property. You then sell the PPOR. The bank will only release this security if the LVR on the investment property will be an acceptable level, such as 80% lvr. This may mean you need to pay down this investment property loan = not idea because when you go to get your new PPOR you will have less cash which means higher non deductible debt.

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Another way to use equity is to borrow from a LOC on one propertyand then use ‘cash’ for deposit and no cross collateralising.

If you sell either property there is no requirement to pay down loan if either property sold. You would need to discharge the loans on the property securing it, ie the loc on property A, but the remaining loan would not need to be reduced. For tax reasons things may be different – sale of an investment property may mean you cannot keep claiming interest on any loans kept open – depending on the circumstances.