Heidi Armstrong – Your Mortgage Expert, State Custodians
I am buying a new home and I am considering keeping our existing home and using it as an investment property. Are there any factors regarding [the line] that should be considered?
Factors to consider. You may need to access equity from your existing home to assist in being able to borrow enough for the new place. There are two ways to do that. First simultaneously apply for an increase on your existing loan and apply for a new loan for the new home. Or two apply for a new loan secured by both properties to be able to borrow what’s needed.
Another factor to consider is that if you use both properties as the security for the one loan, that loan should have at least 2 portions. One part for the existing debt on your old home and a one part for the debt to be used in the purchase of the new home. Keeping the debt separate for each property gives you the flexibility to utilise any potential for tax deductible interest in the future, no matter which property ends up being an investment property.
Finally you need to consider tax management. Talk to your tax accountant about this. Consider that if you have paid off most of your loan on your existing home, it will have minimal debt. If you borrow against that property to help fund the purchase of your new home, the new borrowing is personal debt, even though the property used as security becomes an investment property. Where the money that you borrow goes determines its investment character, not the security that’s used. So you will end up with a lot of personal debt with very little investment debt.
As the tax deduction is one of the most important factors in an investment property strategy, the lack of tax efficiency in this strategy needs to be considered. Again have a chat with your tax accountant about it all.
What factors should you consider if you're buying a home and using existing home as an investment? Heidi Armstrong, Director of Operations for State Custodians Mortgage Company has the answers for this and many more home buying and investing questions on statecustodians.com.au Loan TV.