There are many things to consider when upsizing or even downsizing your home. Sitting down with one of our consultants to go through the options will help give you a much clearer picture of what is possible, how best to structure the finance and how it will all fit together.
Do any of the following statements ring true for you?
- Now is the time for us to upsize and I’m not sure of the best way to go about it, there are so many options…
- Our place is starting to feel really small, there’s simply not enough space
- We’re planning on having a family and we need to upgrade to a larger home in a safe neighbourhood
- Could we stay put and renovate, add an extra room or two or even put on a second storey?
- We have to upgrade, that’s not negotiable, but is there a way we could keep this place as an investment property rather than selling?
Example: A common scenario we come across is when a client wants to keep their existing home and buy a new one. The idea being they will rent out the existing property and this will become an investment property.
Here are the common themes to this scenario and they deserve careful consideration before making a decision either way:
- If you borrow money using the equity in your current property to purchase a new home, then you will need to borrow the full purchase price plus all associated costs (unless you have other cash to contribute). I.e you will be borrowing 105% of the purchase price as a guide (allowing 5% for costs)
- The loan remaining on the existing property becomes tax deducible once that property becomes an investment i.e once it is rented out.
- The new mortgage, which is not tax deductible for example, would be $630k assuming a $600k purchase. You are left paying the higher debt from your post tax income whilst the smaller debt left on the Investment Property becomes deductible (assuming you have reduced your mortgage over the years).
- Ideally you would want to have this situation the other way round, with the higher debt on the investment property. It comes down to cashflow. When you sell, you have cash to put towards the new home, taking a smaller non-deductible loan and thereby reducing your loan repayments.
- You then have the option of putting the remaining equity into another investment, which then all the costs i.e 105% of the new purchase would be classifed as deducible or ‘good’ debt.
- Good debt simply means you are making more money that you are paying and using leverage to increase your wealth.