Using equity in current residence to purchase new principle residence.

Hi Krystal

welcome aboard

you can access equity in your current property to find the deposit/costs on your new one.

the only issue is that the equity you release won't be deductible because the purpose is to purchase a PPOR.

the current loan balance will become deductible once the property is rented out.

in hindsight, the loan should have been set up as interest only with an offset – that way, you would have avoided paying down the principle and would still be able to claim a decent amount of interest once the property becomes an IP.

im writing this from a phone so sorry if typos.

Jamie

Hi Krystal,

  Welcome aboard !!   It is great that you have chosen to ask first – this is an area that can be a trap for many.  

  I guess the "issue" they are talking of is that you will be likely paying tax with it being +ve geared.   And they seem (to me) to be right.   Any loans made may become tax deductible based on the PURPOSE of the loan.  In this case, the purpose is to partially fund your PPOR.  Thus, that part of the mortgage is NOT deductible. 

  And, yes, I think it would be smart to keep these borrowings separate from the rest of the mortgage.  That way, the original mortgage becomes deductible as soon as it becomes a rental.  

  When I mentioned a "trap", a more common scenario is for a new investor to upgrade their PPOR after having lived in the old one for several years – and have almost paid it off.   The old PPOR becomes a rental, but any small mortgage remaining is ALL they can claim as tax deductible (as any drawings to fund the new PPOR are not deductible).    Thus, it becomes hugely +ve geared, and Tax must be paid on the extra income.  

  To this situation, many advisers say "Sell the old PPOR, take your cash and buy the new PPOR, then use what remains to buy another IP".  Then all funds used to buy the IP ARE deductible.   In your case though, there still remains a decent mortgage that can be claimed, so it could still be a goer even if slightly +ve geared.  Down the track, you might choose to borrow the equity from this old PPOR (now an IP) to fund deposit and costs on a second IP – those new loans then become deductible.

  Do have a chat with a broker or other adviser re this situation (there may well be one or two replying here later on).   As I said, it is good that you are questioning now – this means you can chart your course for the best outcome, then implement the plan.

Benny

PS  If you don't have one already, do check out Offset Accounts – you might want to put one in place, even if you decide not to sell….   THey might have helped here, but can certainly help into the future.   Check for the post re Offsets in this link :-

   https://www.propertyinvesting.com/forums/general-property/4349450

Hey Krystal,

I was in a similar position a few years ago. I left it positively geared and it's really good to know that you have a house / unit generating an income while you're feet-up drinking mojitos in Vegas (.. i wish!). From a purely financial perspective, it's not the best as you end up with a high loan on your PPOR and lower loan on your investment, so the tax deductions aren't the best.

Considering my next PPOR was well within my means, and I wasn't stretched and looking for tax deductible savings, I left it and I'm pretty happy that I did. In the end, you can expand your portfolio and get one / two slightly negatively geared / higher capital gain properties that balances out the other property.

This might not be your situation though.

PS. If you do keep the unit. Get the equity drawn as a separate account and pay it down ASAP. Then redraw for investment purposes and buy another IP with it.