debt recycling pro's and con's

Hi All,

Over the next 6 months I will be undertaking my very first non-deductible debt. Amount will be $600k. Not sure if helpful but existing deductible debt is $1.56m

Naturally I would like to reduce this as quickly as possible so besides the "lil bit more" than the minimum P&I, and the annual tax refund and bonus I know that the "debt recycling" strategy is mentioned quite frequently.

I'm quite open to this option, as one particular property (out of 3 excluding proposed PPOR) I purchased as a FHB where I borrowed 90% and paid no LMI and had entire stamp duty component waived. I do not mind selling this property pending sale price in order to execute the debt recycling strategy. As a bare minimum I would only sell this property, and this would provide me $275k net sale proceeds.

The point of this thread is to ascertain the pros and cons of doing this to assist in my decision. I dont plan on making this decision until September 2018. This is timed in conjunction with my fixed rate, and by then my wife will be on mat leave again.

For now so far I have jotted down;

Pros:
- minimising non deductible debt
- improving cashflow
- overall deductible debt position wouldn't change, as I would look to re-borrow same amount if not more to obtain additional IP
- the property I am planning to sell is owned 50/50 between the wife and I. Sell this, and buy new IP I will put it in same ownership as I do with the other two IP

Cons:
- now that lending criteria has changed, I might not to be borrow even same amount anymore
- opportunity cost - sell this place, might lose out on capital gains
- solicitor/real estate agent costs in selling property

Cheers!

 

Ensuring you have a quality broker would be Tip #1. They may guide you.

 

Good point. Just to elaborate why I have no intention to put funds in the offset incase one day this PPOR be an investment. (hence why I need no guidance from a broker in this situ)

Like many young Gen Y, my parents are assisting us, by buying a PPOR in joint names (4) all as borrowers. Hence the reason why I want to repay this debt asap, and then look to leverage off this security with just me/my wife and parents as g'tors for new/replacement IP.

 

Selling a property as part of a debt recycling strategy - you have covered the points. But another is that you could sell CGT free (assuming you lived in it as a FHO). But if you held off selling you would perhaps get some more capital growth - you can always sell later. You may even keep it CGT free for a bit longer.

Do you think it a good idea to buy your PPOR in 4 names? Do your parents have a main residence? Will they consent to borrowing further in the future?

 

generally, it wouldnt be a good idea to buy with 4 names as borrowers/owners etc.

in my situation with parents on pension and to satisfy means testing etc. Yes for us specifically our only option is to buy in 4 names. Their plan is to sell their ppor, and inject proceeds for new place thus their balance sheet remains unchanged, and me/wife will come in and fund the rest.

RE CGT, I believe we would be succummed to some tax here as yes we have lived here for 6 months back in 2014, and since its been rented out!

 

I suggest you get some legal advice on that.

 

Whoa. STOP..You will affect their pensions quite seriously. Their home is an exempt asset and does not produce income and so also not subject to income tests. Your plan would change that..It could amount to gifting too (ie their 100% interest becomes 50% ?). They could lose their pensions altogether or have it drastically altered. They should seek specific advice on their Centrelink issues...Our practice offers a aged care and pension advice service since its financial advice it need experience in pensions and also a AFSL - I can introduce you.

There is a Granny flat concession that may assist.

Lost me on the CGT issue.

 

how so? I should add that the new property will be owned 30% in our name, 70% theirs. 70% of $2m is $1.4m, what their current PPOR is worth....

no doubt I have spoken to the DVA, and confirmed this is all fine etc..

 

How will you access equity?

 

I asked this question as I definitely plan on doing this in the future.

New loan will be in mine/wifes name. Parents as security g'tors.

the DVA is fine with this since they are not a primary debtor/borrower.

 

How will you access equity when your parents have no income but the pension? living expenses for 2 couples will significantly reduce serviceability

 

Sorry if this is too rude. But you would be a fool to go down this path without decent legal advice after the comments above. Imagine if your parents did loose their pension?
Just my opinion.

 

Your parents can't go 'security' guarantor on this jointly owned property. They would have to be co borrowers on any future equity release. As terry said thier living expenses would reduce the income available to use for borrowings. May not make a big difference, depending on your income.

Who told you they could be security guarantors on a property with shared ownership? married couples can provide a servicing guarantee for jointly owned property, but they are the only exception. Mum and dad would need to be joint borrowers with you or be a guarantor, but the guarantee doesn't provide them or you with any benifit that I can see. Their share of the property is still at risk, from a lending perspective it's exactly the same as being a co borrower.

 

I believe they could be security guarantors of equity release if they were deemed acceptable guarantors, guarantors don't have to have beneficial interest in the next purchase. But the issue is them being an acceptable guarantor of the equity release if they're pensioners not earning an income - most banks are against this.