Need help understanding how to use equity in my house to buy another house

[Deactivated] on 01/01/2020 - 02:03

Hi OzB fam.
So we've basically paid off our first home.
It's worth about $600k+ according to the bank.
My understanding is that I can use up to 80% of the value of my home as equity/security on a new place.
I could also rent our house out for $400 a week (perhaps $450 but being conservative).

I have found another house I really like, and the seller wants $700k.

So am I understanding correctly that I could use 80% of my home (480k) as a 'deposit' towards the next house?
And then the bank would give me a mortgage for $220k on the remaining amount of the 700k?

Or have I got that part wrong?

My idea was to rent out the old house for $400 to 450 a week to help pay the mortgage on the $220k loan on the newer house.

Any guidance/corrections to my naevity are encouraged and appreciated!

Financial

Comments

  • zonra on 01/01/2020 - 02:14

    So we've basically paid off our first home.
    So am I understanding correctly that I could use 80% of my home (480k) as a 'deposit' towards the next house?
    And then the bank would give me a mortgage for $220k on the remaining amount of the 700k?

    As in the house is still yours but the bank will give you its value toward the new loan? Nope.
    I think they meant they could use it as security for the new loan, i.e. in the event that you default on the new (700k) loan, your current house can be sold to cover the bank’s losses.
    Also possibly no mortgage insurance required.

    Another scenario would be remortgaging the current home and use that money toward the new loan, but it’s basically shifting money around, the total loan amount is still the same (e.g. say you remortgage the house for 480k and use that toward the new house, now you have 2 loans 480k+220k, i.e. the same cost of your new home).

    • t_c on 01/01/2020 - 08:16
      +1

      An Accountant might want to chime in, but I think there are some potential pitfalls that need to be considered with capital gains tax and primary residence, depending on the structure of how things are set up.

  • dcep on 01/01/2020 - 04:14
    +2

    leveraging equity simply means you can borrow more

  • capslock on 01/01/2020 - 05:03
    +2

    You are effectively getting a $700k loan supported by the two properties. If your income is enough to service this loan then you should be able to get it. You might need a loan greater than $700k to also pay for stamp duty.

  • garetz on 01/01/2020 - 05:56
    +3

    If the market were to crash you would lose the house and the investment property, what you are considering is very high risk. Talk to a financial planner.

    • askme69 on 01/01/2020 - 06:09
      +4

      "If the market were to crash"

      Not "IF" but when.

      • garetz on 01/01/2020 - 06:13

        true, i prefer to look at possibilities, but you are right a crash is inevitable, its just a matter of time.

        • dcep on 01/01/2020 - 11:55
          +2

          still waiting …

          after 25+ years of soaring house prices in Sydney

          when is the crash ?

          • gyrex on 01/01/2020 - 13:33

            @dcep: After the impending recession. Might not 'crash' but there will be a considerable negative impact on housing which we haven't seen in decades.

          • garetz on 01/01/2020 - 14:22

            @dcep: There has been 3-4 crashes in the last 25-30 years, in the early 90s, when interest rates rose substantially topping 12%, the gfc in 08/09, in 2012 there was one that i dont know what precipitated a smallish crash, and last year.

            • dcep on 01/01/2020 - 19:11

              @garetz: you call those "crashes" ?
              you know what a crash is like ?

              we pretty much dodged the 08/09 GFC with mining boom and after that construction boom follows on 2012

              see the graph below and you won't call those crashes
              go compare with the real crashes in other countries

              https://www.economist.com/graphic-detail/2019/06/27/global-h…

              i'm not saying it won't happen to us, but we have definitely not experienced the real blow of crash for couple of decades

              • garetz on 01/01/2020 - 20:01

                @dcep: I think we have a different definition of what crash is, to me its deflation leading to a reduction in prices over 5-10%, what you are referring to is more like a catastrophic event that happens once every 30-40 years like a great depression.

                • Cheapskate Paul on 01/01/2020 - 21:50

                  @garetz: A 10% reduction is referred to as a correction. A crash is significantly worse than that. Just ask anyone who bought in Darwin about 7 years ago.

    • Some Guy on 02/01/2020 - 00:32
      +2

      What does "the market" have to do with anything? If the OP couldn't make the repayments, only then would he lose the properties.

  • EFC94 on 01/01/2020 - 06:43
    +3

    Going back through some of your previous posts it surprises me that you need help figuring something like this out when in the last 5 years you've paid off $90k worth of student loans in America and now a $600k house with a part time job working 30 hours a week. Surely you could just wait for a few more years and save for a hefty deposit?

    • [Deactivated] on 01/01/2020 - 11:23
      -5

      Received a huge inheritence last month and had been wondering what to do after paying off house with that inheritence .
      If you'd been better with your detective work you'd have known my wife also works full time and makes 100k+ per year. I work 30 hours a week and look after kids one day a week.
      Hope that's okay with you?

      But yeah, absolutely clueless as to how the equity situation works, didn't seem like I'd got my head around it.

      Was (wishfully) thinking loan for new house was only 220k when I was obviously wrong.

      • lgacb08 on 07/01/2020 - 20:27

        Not sure if it's too late but don't use that money to pay off the offset until you figure out what to do with the money because the moment you reduce your loan balance you won't be able to claim much interest as tax deduction should you decide to shift the money out for the second house and rent the first one as investment property

  • Meho2026 on 01/01/2020 - 07:16
    +3

    Get some proper advice, outside of ozbargain or it will cost you big time tax wise.

  • Ocker on 01/01/2020 - 08:08
    +1

    You would not be able to claim a tax deduction for the interest payments on the loan against your current house. This being because the funds from the loan have not been used for income producing purposes, rather a house for you to live in.

    • JIMB0 on 01/01/2020 - 10:14
      +1

      That would really hurt as the $400 a week rent would be taxed at the op's top marginal rate.

  • tightpike on 01/01/2020 - 09:33
    +1

    You would need a new loan for 700k + extras (100k stamp duty etc). The bank will want security for your new loan (your home) in case you default on the loan, in that case they will repossess both properties to get their money back.
    If you purchased the new property and the market booms , well happy days for you!
    Big risk, big reward!

    • [Deactivated] on 01/01/2020 - 11:46

      thanks heaps. very big risk indeed.
      Going to have to think about it and work out all the tax benefits.

      • Peter Enis on 01/01/2020 - 11:55

        Going to have to think about it and work out all the tax benefits implications.

        FTFY

        • [Deactivated] on 01/01/2020 - 11:57

          no benefits? just implications?

          • tightpike on 01/01/2020 - 13:48
            +1

            @[Deactivated]: @murphy84: To benefit from a tax perspective. The new house becomes the investment property and you rent it out. It will be negatively geared. Then the interest and other expenses (upkeep, agent fees) essentially become a tax deduction.

  • JimmyF on 01/01/2020 - 10:55
    +1

    My idea was to rent out the old house for $400 to 450 a week to help pay the mortgage on the $220k loan on the newer house.

    Ummmm

    So am I understanding correctly that I could use 80% of my home (480k) as a 'deposit' towards the next house?

    This is a LOAN as well and its not 'free' money as your calcs above show.

    So you'll have a $480k loan and a $220k loan.

    • [Deactivated] on 01/01/2020 - 11:45
      +1

      yep, I see now. Thanks for clarifying and disappointing me. lol.

      • JimmyF on 01/01/2020 - 16:36
        +2

        If only it was that easy to get free money! :)

  • [Deactivated] on 01/01/2020 - 11:44
    -2

    Hi guys, thanks for the info.
    My logic was (originally) that I could just borrow the difference between the value of the 2 homes (220K) and then pay that off. Seemed too good to be true and it was haha. I thought I could use the $400 a week rent from the old house to pay off the new mortgage of 220k lol.

    Anyway, so with $480k+$220k that i'd still need to pay off, I'm wondering

    1) If I rent out the older house, is there a limit that I can claim repairs/upgrades as tax deductions?
    2) what are the main tax benefits of renting out the old house?
    3) Can I claim the interest on the new loan at all?

    And yep I will be seeing a financial planner- but I'm a complete noob to this and excited/trying to wrap my head around it.
    Thanks heaps!

    • JIMB0 on 01/01/2020 - 12:37
      +3

      1 - Yes.
      2 - Bugger all.
      3 - No.

      You should have got financial advice before paying off your loan.

      • kiitos on 01/01/2020 - 13:02
        +1

        You should have got financial advice before paying off your loan.

        Yes, OP I believe this is important advice from JIMB0 - eg if you had an offset account you could have put the inheritance in that to minimise interest but keep the loan active, then when ready to buy a new principal residence to live in, withdraw the money from the offset account to contribute to the new property. The old property would then still have a mortgage and you could claim its interest as a deduction if you rent out the old property.

        But if you've paid off the old loan, then there's no interest accruing to claim against rent.

        • [Deactivated] on 01/01/2020 - 13:29
          +1

          I haven't actually paid off the loan with the money yet- it's sitting in the bank. My plan was to pay off the house so I had no mortgage left at all.
          But yeah, I am going to see a planner.
          Thanks for the advice guys, really appreciate it.

Login or Join to leave a comment
Login Join