Using equity to buy another place??

[Monster's Mum]

Hi All,

Has anyone actually used the equity in their current home to buy another house???

We are looking to upgrade to a bigger house and are thinking of keeping our existing place as an investment and we would have to use the equity in the current place to help finance the new place (although we do have some savings to use as well - not enough to cover deposit and stamp duty tho!).

My question is how does using "equity" actually work???? ie do we need to draw the equity on the current loan (thereby increasing our current loan) to pay for the deposit and stamp duty on the next place or does the existing loan stay the same and the bank lends us 100% of the purchase price of the next house.

I know I could ring the bank but I find that I am on the phone for hours and they pass me from one person/department to the next as one single person can't seem to answer all my questions.

We would obviously like for the "new" loan to be as small as possible and the current loan (for the potential investment property) can be maxed out if necessary, so would simply refinancing be the way to go?

If anyone has any experience in this area, your advice/knowledge would be greatly apprecitated.

Thanks for your time.

[rynosmum]

It depends on how flexible your loan provider is.

You are right, you want to have the maximum capacity on your loan for the investment property so you can gain the maximum tax advantages.

The way we usually use equity is to simply do what you are saying. EG: Your house (Principal Place of Residence) gets revalued by the bank at say $450K. You only owe $300K on the loan therefore you have 'equity' of $150k on the loan. You could redraw on that amount however you will then not be advantaged for your investment property.

The bank should take your income, current paper-based equity, and both the properties as security to allow you to transfer the balance to the new loan.

We had one financial institution not allow us to do this so we switched banks

Edited to add: You still may not get the full 100% loaned to you without mortgage insurance - ask their advice on that one.

[WeloveHarriet]

You can borrow for the new place using it as first security then your existing home as secondary security. Banks will normally lend you up to 80% of the value of both properties less your existing debt load (or 90% with mortgage insurance but this will cost you extra in fees). You cannot borrow "extra" on your existing home loan to allow it to become a tax-deductible debt. Your existing loan limit is what becomes the investment debt and therefore may become tax deductible. You will need to sit down with an accountant firstly to see if it is going to be beneficial to your position to retain your existing home. If you have ever used your home to borrow extra funds for something like a car, holiday, debt consolidation etc then this can sometimes be deducted from the tax deductible limit as well - ie if the house originally cost you $100k but then a couple of years later you borrowed an extra $10k for a car when it comes time for tax purposes you can only claim the original $100k amount (from memory). Again you should sit down with an accountant first then a bank / broker as you need both sides of the discussion fully explained.

[Monster's Mum]

Thanks for the reponses ladies - this helps heaps. We did actually borrow more for a holiday a few years back so I hadn't thought of that implication before now. Also someone from my mothers group mention captial gains tax implications if we ever need to sell the investment property......so I have lots to think about. Looks like an appointment with the accountant and bank is in order....

Cheers - and thanks for the replies.

[mummyof5]

Just thought I'd add some extra info for you. We did what you are planning. We actually had tenants in our house already as we were posted interstate. We borrowed 80% of the value of that house to buy this house, that we live in now. We did have to pay mortgage insurance, as we were using a loan for the deposit. We also had increased the amount of our mortgage, so only the original purchase loan amount is used to calculate our rental loss.
The only problem we have with it, is I am a SAHM, so therefore have no income (nothing to declare at tax time), so if I don't have a taxable income, I can't claim a loss against it, so we have a loss on the property, but can only claim 50% which is my DH's% of ownership of the property.
My tax man told me that apparently you have an amount of time (like 5 years or something) to rent out your property before you pay capital gains. Apparently your 2nd property will be considered your capital gains earner, so if you are planning to live in it for some time, the laws will probably have changed by the time you move out anyway .
Hope this helps you think of other questions to ask the bank or accountant...