Mortgage Strategy to Buy Second House?

FatTofu on 03/08/2018 - 18:40
Last edited 03/08/2018 - 21:09

Say I bought the current small house about 3 years ago for 500 K, borrowing 400 K with 30 year term as P&I. I haven't repaid much of the 1st loan (still 27 years left and close to 380K owed), but at the moment I believe this small house would be worth 550K.

In order to get enough deposit for a big (second) house (with my partner), can I refinance the 1st loan for the small house to borrow more? Assuming the valuation did come out at 550K and I could afford ongoing repayment, can I borrow 440 K (80%) AND RESET the 30 year period for repayment? I figured extending the originally remaining 27 years to 30 years would lower my ongoing repayment a bit. More importantly, I could get roughly 60 K cash (440 - 380 - fees).

I'd appreciate if anyone could let me know the tax implications for me doing this as I will move to the big house with my partner and rent out the small house.

Am I better off refinancing as an investment loan (as opposed to owner-occupier loan) for the small house so that I can claim more tax deductions? 5% investment borrowing rate with 32.5% tax deduction is better than 4% rate for owner-occupier?

More importantly, would I be taxed on the 60 K taken out as a result of refinancing the small house? It is confusing as that 60 K might be considered as money from investment? Although I thought it's not.

Financial Home Loan Tax Deduction

Comments

  • HighAndDry on 03/08/2018 - 18:53

    can I borrow 440 K (80%) AND RESET the 30 year period for repayment?

    You could, but it'd depend on the bank, you and your partner's financial circumstances, and just be warned banks' valuations of properties are always lower than actual market value (for obvious reasons, they tend to be more conservative).

    As to tax….. it doesn't matter what the loan is called, if you're using it for the big house and you're going to live in the big house, you can't claim those interest expenses. As to the details - talk to a tax accountant.

    • FatTofu on 03/08/2018 - 19:45

      Sorry I meant to ask about the 60 K cash from refinancing, as if it would be a form of "income" that I have to pay personal income tax for?

      • onevstheworld on 04/08/2018 - 20:56

        No. Refinancing to unlock equity does not incur CGT… that only happens when you sell the house (plus, when you do sell, a portion will be tax-free because it was your PPOR… talk to your accountant about this now so you can preserve any records you'll need for the future)

  • cnmarine on 03/08/2018 - 19:12

    Your math is confusing, assume everything goes as planned and you refinanced and borrowed 440K against your house…….you're only 60k up and 60K won't get you anything…….unless your job's pay grade jumped a few levels or your new partner's income can fully support the second mortgage.

    • FatTofu on 03/08/2018 - 19:47

      My partner earns about double of mine and had no mortgage or credit card or whatsoever, so we are looking at 800~900 K houses and that 60 K could be 1/3 or more of the initial deposit required

  • ColonialBoy on 03/08/2018 - 20:05
    +1

    I would keep and your partner's finances completely separate. Sometimes you have to be selfish, and your long term financial future is one of those times.

    You seem very naive financially. Work through the scenarios on a speadsheet.

    You can only claim an interest deduction (and pay CGT) on assets that are intended to produce accessible income. In most cases you can not claim an interest deduction on your PPOR.

    Having a tax deduction is NOT your aim in life. For example, if you can only rent your investment property out for half a year, then your investment income will be smaller, and tax deduction larger. You aim is to use leverage to increase long term returns.

    You can also borrow to invest in stocks.

    • FatTofu on 03/08/2018 - 21:08

      Thank you for the advice. Now I am most concerned about any potential income tax for that 60 K taken out as a result of refinancing the small house

    • Neenie Beamer on 07/08/2018 - 00:07

      I agree. I made the same mistake. Never again.

  • T-man on 03/08/2018 - 20:15
    +1

    Your situation is pretty my current situation. Here is what I am doing.

    I refinance my current to another lender with a larger amount and use that money to deposit for the larger house I am going to purchase and have some cash left in the new offset account.

    And another loan with thr new leader to buy the second house and rent out the old one. You need to tell the new lender you will rent out the old house so that they let you to borrow more. pm me if you would like to know more.

    • bottletop on 03/08/2018 - 21:10

      I thought the ATO got suspicious if you refinanced your non-tax deductible mortgage into larger tax deductible mortgage?

      • FatTofu on 03/08/2018 - 21:17

        What if it's two steps? First make it larger still as owner-occupier loan. Then after settlement with the second house, switch this larger loan from owner-occupier to investment and start renting it out. OK it does sound like costing time and money.

      • ColonialBoy on 04/08/2018 - 13:20

        This was/is called as wash sale. eg

        Have a mortgage on PPOR. No tax deduction.

        Discharge the mortgage

        Purchase income producing shares, and initiate a new mortgage on the same house as collateral for the shares. The interest on the PPOR is now tax deductible.

        • FatTofu on 04/08/2018 - 17:39

          This is more than I could understand. Does the same house then become part of the investment even if you live in it as PPOR?

        • ColonialBoy on 07/08/2018 - 08:43

          @yunshi09:

          Yes. Interest is deductible depending on the purpose of the loan, not the security.

          You can do the same sort of thing with a hobby farm or even a real farm. Live in the city and your interest on your dwelling is not deductible, move to a rural area and the interest is deductible. You have to show income from your farm though.

  • smuggler on 03/08/2018 - 23:39
    +3

    Man you people sure love being in debt. Why not just enjoy yourself with that money and keep the 1 place?

    • whooah1979 on 04/08/2018 - 06:08

      Now where is the fun in owning just one property?

      • smuggler on 04/08/2018 - 08:29

        Are you one of those people that shows off his debt as wealth?

        lel

        • whooah1979 on 04/08/2018 - 11:06

          people that shows off his debt as wealth?

          Do people to that?

        • ColonialBoy on 04/08/2018 - 13:22

          @whooah1979:

          Yeah. "I have a million dollar property portfolio" means "I have $900,000 debt".

        • dcep on 04/08/2018 - 14:10

          every home owner in sydney is millionaire

        • smuggler on 04/08/2018 - 14:31

          @phunkydude:

          million in debt

  • MatthewSoul on 04/08/2018 - 10:13

    The 60k (if lucky) from refinancing is not taxable since it is still borrowed money.
    Do owner occupy if your income is high enough.
    I think what you are planning to do is dragging out that extra cash into the deposit of your joint investment property.
    Also make sure your next property is eligiable for depreciation.

  • Stimps on 04/08/2018 - 10:26

    I hope you’re not in Sydney or Melbourne.

    • FatTofu on 04/08/2018 - 17:40

      Brisbane area, so still kind of "affordable"

  • tabz on 04/08/2018 - 16:16

    You have a couple of options if you want to use the equity in your current property to purchase another one.

    Option 1: Stand-Alone (You will have 3 loans in total)

    • Refinance your existing mortgage into an investor loan ($380K) - Security against Property A
    • 2nd mortgage on your existing loan as a top up ($60K) - Security against Property A with the purpose of using the cash as deposit for Property B
    • New home loan on Property B - Security against Property B

    Option 2: Cross-Collaterisation (You will have 2 loans in total)

    • Existing loan ($380K) - Security against Property A only
    • New home loan on Property B - Security against Property A & B

    Speak to a mortgage broker, and do your own research on what is better for your situation.

    • FatTofu on 04/08/2018 - 17:43

      Thank you so much as I didn't know there were these options.

      But in Option 1, the top up ($60K) then become part of the investment loan? Any income tax on this top up ($60K)?

      • onevstheworld on 04/08/2018 - 20:46
        +1

        Never cross-collaterize… it becomes a pain if you ever want to sell/refinance/change banks with one property but leave the other alone. It is 1 loan covering 2 properties… changing something with one property means also doing the same with the other… lose a lot of flexibility. Banks love it because it's a way to lock you in as a customer.

        E.g. say property A goes up by $50K, and property B goes down by $50K, and you want to revalue property A to unlock equity. If they are crossed, you have to revalue both together… $0 available from refinance. If they are not crossed, you can unlock the $50K from A independently of B.

  • chumlee on 04/08/2018 - 21:00

    You may think it's worth $550k now but best to check with bank what value they would give it. Brisbane market has been soft lately

    • FatTofu on 05/08/2018 - 19:06

      You're right but still feels better than SYD/MEL :)

  • onevstheworld on 04/08/2018 - 21:02

    Have you spoken to your bank or your mortgage broker yet? You may not qualify for an additional loan now.

    3 years ago, lending criteria were pretty lax… even if you have enough of a deposit, your income may no longer be able to service 2 mortgages. AHPRA is forcing the banks to consider existing home loan debt repayments at 7+% P&I, plus they are being a lot more conservative with assessing your expenditure
    http://www.abc.net.au/news/2018-04-06/homebuyers-tougher-bor…

    • FatTofu on 05/08/2018 - 19:09

      Not going with a big bank. My 1st loan was with a small fund and just last month they told us could borrow up to $800K, provided that we have 20% deposit and my 1st small house being rented out. Apparently we haven't saved enough for a large deposit and thus looking at getting money from refinancing.

      • hoey888 on 07/08/2018 - 09:30

        Just be wary. The lender will say you can 'borrow up to XXX,XXX' but the reality of them actually lending you that is another story. Usually they will want people that meet their serviceability requirements. Speak to a broker to understand your serviceability first and go from there.

        *I did a refinance in 2017 to unlock equity in a investment property that was held for a number of years to use as a deposit for another investment property. This was done via a split loan. (1 loan for to replace the original loan, 2nd loan for top up to property's value). This effectively meant no 'physical' cash was required to purchase the 2nd property. This strategy is an extreme example, as the initial purchasing bank valuation versus bank refinance valuation doubled during holding period.

        @onevstheworld definitely agree. Never cross collateralise your investment loans. It makes it messy if you need to refinance/payout your loans.

        PM if you have any questions.

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