All the major banks a few months ago got a slap on the wrist from their governing body regarding how much money they were loaning for investment loans (the risk for the loan to value ratios was getting to high). You will now find you can't borrow 100% of the purchase price for any investment (especially the big banks) and most investment loans interest rates are now also higher (our variable rates are going up next month). That may be why the bank is suggesting to borrow 100% for a house you live in and renting out your current one, because you will most likely need a much larger deposit if you're buying a rental now.
PP is right that if you borrow money to live in a house it's not tax deductible, as the purpose of the loan has to be for investment, however if you have a loan still on the old one you will be renting that may become tax deductible (talk to your accountant). Also, if you're going to rent out your old house make sure you get it valued just before you start renting, as then when it comes time to sell you should only pay capital gains tax on any amount it's risen in value since it became an investment, not the entire time you've owned it.
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03-08-2015 06:41 #11Member
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03-08-2015 08:52 #12
just looking it up (as it is a considerable time since I did tax, and the rules change all the time)
it appears that common sense has finally reigned at the ATO (for once) and they have now decided to allow interest deductions for a loan that was borrowed for a private property if you move out and rent it. (they didnt use to, if you borrowed to live in it, you couldnt then rent it out and claim the deduction)
so ... if you decide to go ahead, restructure the debt as much as possible on your current property, so that the majority of the interest is on that.
The banks certainly will lend 100% of the property ... but only if your total loan-value ratio is lower than 60% (can change for some banks but mostly its around 60%) and that you have sufficient income (including the rental income) to cover both loans.
According to the ATO you can cross collateralize the loans, but the loans must be separate loans with separate accounts in order to qualify for interest deductions.
The other thing I would mention is - real estate is a long term investment ... the cycles are over a long period of time and often 5 years isnt necessarily long enough. You MIGHT make a good profit in that time, but equally you might not.
I wouldnt go into it if you need the money out after 5 years. on the other hand if that is just a time frame in order to have goals etc but you dont need to sell up after then its all good.
03-08-2015 13:40 #13
Keep in mind too even though the loans are separate they are linked as you have used equity to purchase.
If you sell one ( depending on which is sold etc) "equity" gained from sale might have to all go onto remaining property.
Likewise you may find yourself in bigger debt if the property you are keeping value has drops ( and you don't have the equity from sale to cover).
03-08-2015 13:54 #14
It actually doesn't matter which one you rent as far as 'legal' goes. As long as come tax time you're working out your net capital gain or loss using the interest paid on house A:rent earned on house A.
It may just work out that it's financially better come tax time to rent your current house and live in the new house.
03-08-2015 14:02 #15
So you won't necessarily be in more debt, you just won't reduce your debt on the remaining house by as much as you had hoped.
03-08-2015 14:24 #16
Example - value of ppr is 400k with current mortgage of 200k ( therefore 200k in equity).
Purchase investment for 400k @ 100% therefore 800k worth of property with total mortgage of 600k. You manage to pay 50k off debt, so owe 550k.
Suddenly something unexpected happens, need to sell but values have dropped 150k each ( so investment and ppr are only valued at 250k ea- yes extreme but gfc has proven this can happen).
Whilst servicing the loans the banks don't care you technically owe 50k more than total values however go to sell and suddenly you are faced with the very real concept of owing an extra 50k.
Trust me we went to sell a few years ago and this exact scenario could have played out. We were fortunate we could ride it out and sold without this happening a few years later
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03-08-2015 23:20 #17
Either way it is a big risk. I think I have convinced dp to talk to an accountant and get an independent opinion and tailored advice based on our situation. Is an accountant the right person to talk to?
It's the banks that have said it could be an opportunity to invest rather than put an offer to buy then hope to sell this one in time, or sell this one and things fall through for whatever reason and then we get left stranded.
04-08-2015 06:09 #18
Definitely get independent financial advise.
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04-08-2015 09:40 #19
an accountant will help to structure the deal best for tax ... but they will not help in financial planning and whether or not that is the best investment for you.
At the end of the day, you are the one who has to decide on the risk profile and whether or not its the deal you want to do.
look into rental returns for that type of property pretty carefully, allow for rental vacancies, and the most important thing ... always make sure that you have enough leeway/cash so that IF something happened (job loss, rental disaster, interest rates go up etc) that you dont HAVE to sell. That you can still make the repayments for a good long while.
You lose money when you have to sell because you cant afford the repayments. If real estate prices go down, if you dont sell you havent lost anything. Its a long term investment, you continue renting it until they go up again.
But if you cant afford the repayments, and are forced to sell in a market that is not so good ... that is when you lose money.
So its super super important to make sure that you have enough cash flow to cover emergencies, to cover the repayments until you can ride out the problem.
The easiest way to do this is with an offset account.
If the property is $500,000 ... you borrow $550,000 and leave $50,000 sitting in an offset account. All rent and your cash investment amounts are paid into the offset account, and you set up to pay the minimum repayment (calculated on $550k) automatically off the loan each month.
What you are paying in should ALWAYS be more than the minimum repayment. If you are only paying the minimum, you are borrowing too much and you should buy a cheaper house.
This way, the offset amount is growing each month (you are paying in more than the minimum, but only actually paying the minimum repayment. the interest is calculated on the net amount, so whatever you have in the offset is saving you interest.
This way, if something happens, and you dont have a tennant for 2 months, you have $50k + in the offset to continue paying the mortgage until you lease the property. If a tennant damages the property, you have the money to fix it and re-lease it ASAP and can arrange that, and claim from insurance after. If you lose your job, you have a few months repayments in hand ...
Its only if you DONT have that safety net that you get into trouble. (eg the market goes flat, you lose your job and the bank forces you to sell not only the investment property but your home as it is used for collateral ... and they sell at knock down prices as they dont care if you get anything back after, they just want a quick sale)
Having the cash reduces the risk of the investment substantially. So to work out if you can afford it ... do the sums carefully. Set up an excel spreadsheet (if you email me I can show you how) to work out the interest/rent/cash investment required and plug in the borrowings and rental returns to see how much cash you need to put in each month to make it relatively risk free.
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04-08-2015 11:32 #20
Thank you so much. I should be able to do a spreadsheet easy enough with that info. If not then I will pm you.
The cash offset account makes a lot of sense.
We have set a price limit of what we are willing to spend on the investment and as long as e don't go over that then that should allow enough to have an offset account like the one you described.
Definitely not as simple as I first thought. Decisions decisions..
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