What to do? Considering a large BNE leafy block. First time other than PPOR.

Hi.

I'm considering buying a new house. I paid my first mortgage off in about 8.5 years. We've been mortgage free for a year or so now in terms of repayments and all I've left to do is disestablish the mortgage, legally.

I've three young kids. I'm 37 years young. The wife is employed but currently not working and earning – full-time mum'ing it.

My salary is around $150k not including super.

I'm considering a larger block (Brisbane, somewhere) possibly more "Tree change" style. I'd like somewhere larger and less "suburbia" for the kids to run around on/enjoy some space. We've fished around places like Forestdale, Karanda Downs so far, but it is just a very cursory look.

I've had mortgage brokers in my ear (Aussie) and they've been enamored by the fact that I've no debt on my first home and have some basic cash just sitting around in the bank (about 60k). No real debts. No school loans. No car loans. No credit cards with any pending large balances to pay off. Good credit history.

To me, however, a couple of things stand out:

1. I'm a single income here – that's got to be a risk to the banks, right?
2. The mortgage broker has said I should "cross collateralize" on my existing home [effectively mortgaging it again to get the security to fund a second mortgage]. It seems to be generally a bad idea from what I read on a bunch of accountancy and financial forums.

I've read a little bit about cross-collateralization and it doesn't seem particularly smart, as the primary security (the original PPOR) becomes "owned" by the institution again and is effectively subject to their terms if you ever need to sell it/do anything with it. General recommendations I've found are "don't do this".

So my thoughts are probably quite naive and simple-minded but:

1. Disestablish the old mortgage entirely.
2. Save up a big enough deposit to take a run at a new place, "clear and free" rather than using the first home as collateral. I am aware that the 20% deposit thing still seems to matter for mortgage lenders insurance for the banks (right?).
3. Spruce up the old home a bit – rent it out. Make some basic passive income out of it (I know that's an over-trivialisation about what it takes to truly make passive income, btw)
4. Move into new place.

I'm sure it has significant tax/gearing implications because I will own the place in entirety (meaning that I can't use our interesting negative gearing laws/tax practices to write down/write off the interest accrual...as there is none).

What would my budget be for the new place? Well, I don't know what I'd be allowed to borrow based upon the specs above. We were incredibly conservative first time around. Paid a $420k property off in 9 years. Next time, I want a bigger place (4 bedrooms + office etc) and a bigger block, so I assume I'd be up in the 700k+ zone depending upon the area in BNE. How big should a deposit be? Surely as large as one could fathom, right?

I'm interested in what others have done/if others have similar circumstances.

Is there a way I should structure my financial approach to do something far smarter here than what I have suggested above?

The mortgage brokers paint a glowing/rosy picture of my current situation – but I'd be almost sure that is a function of their desire for their commission on a sale/their trailing revenue ever after as a result of a successful referral. The reality is - I paid my mortgage off quickly, but I would have thought that doesn't mean much in today's world, right?

Thoughts/ideas appreciated.

 

Possibly consider selling your current PPOR before or shortly after buying the new one.

 

I did consider that (briefly) but then thought that I'd actually like to keep the current PPoR if only because I liked the idea of amassing a portfolio of properties - but without the debt associated with negative gearing approaches. I'm thinking about the micro/macroeconomic factors facing the country at the moment and some economists/financial analysts say we aren't *that* far from a recession - so I am not sure of the right path. Hence coming here to see what people think.

 

I would say that generally its a bad idea to mix investment and personal goals like that.

ie. if you're going into property investment, do it properly - not by just keeping a house because you've moved out of it.

Its also potentially very inefficient tax wise if you're borrowing to buy a PPOR as opposed to borrowing an investment property. One thing worse than negative gearing is being even being able to negative gear because your expenses are not tax deductible!

 

OK - that is good advice. You're right that it would be a case of borrowing to fund a new PPOR. It wouldn't be an investment property as such. It'd be a place to live, a home. Same as the place I am in right now. I guess the context and vocabulary I am using is incorrect. I want a new home to live in. Just a question of what I should actually do with this one. If I could get $3xx-per-week for this residence in rental income - what impact/implications are there in keeping it? Are there capital gains to consider on rental income which make it not worth doing because I own the property outright?

 

Really shouldnt have paid off the loan in the first place. Loan with offset would give a better outcome.

 

It's sitting in offset at the moment - I haven't disestablished the mortgage. All the money is available to draw down upon.

 

Seems like you’re across the pros and cons pretty well. Just wanted to say nice work on being mortgage free at a young age and while supporting a family!

 

Thanks. It hasn't been easy. Worked three jobs at one point to "get ahead" and get it _done_. Just trying to figure out where to next. Three young kids makes this house feel small (three bedroom + home office, pool) which seems pretty strange to say - but I can see our future years meaning that they will each want their own room - so we're then well out of space, by that point...

 

This is confusing and conflicting.

I am guessing you have an Offset attached to your loan AND the amount in the Offset equals the loan principal. That is, the loan is “fully chocked”.

Is that correct?

If it is, then you have NOT

Why wouldn’t you just buy your PPOR using the funds in your Offset for your 20% deposit, take out a new loan for the balance of the purchase, ensure this second loan has an Offset and transfer the balance of the first Offset over to the second Offset and rent out the first property?

 

Hi.

Just to be clear - the loan account ("mortgage") is just one account. There is no "additional" offset account. The account simply has a redraw facility and all the money that is paid into that account acts as offset against interest accrual. There is no additional "offset" account. The loan amount remaining to be paid (balance) is $0 and the bank sent me a letter saying that they would no longer be taking automated direct debits from my other account, as the account balance is paid in full/there is no outstanding balance to be paid. Should I redraw down on that balance - yes, the repayments (and interest accrual) would restart.

That would be a way to do it that does make sense, yes. I like that idea in terms of its simplicity. Doesn't seem like I'll have my cake and eat it too, irrespective. It seems like the ideal scenario is to have enough of a deposit to minimise the next loan (self evident) but the catch is making the current PPOR useful if it is my intention for it to be an investment...

 

it isnt an offset then. The problem is that if you redraw to buy a new ppor, the interest is probably not deductible.

if you had a loan with the full amount in offset, and you use the offset amount to buy a new ppor and rent out the old place, interest may be deductible.

you are not understanding what people are talking about. Suggest reading up on offset accounts and asking your accountant, mortgage broker etc

 

House was purchased for $418k in 2010.

$216k available to redraw.

Based upon current listings, it might rent for >$430 pw.

I've had a few real estate agents through over time - they say it probably has zero property growth due to the suburb. I've added a 5.5kw Solar array, new bamboo floors throughout (professionally done, no DIY!), a very large solar hot water array, a very large double-width carport (again, all professionally done) etc - but according to the local agents, it probably hasn't appreciated in value at all.

 

But the OP could remain in the current property as PPOR and buy another property as an IP using the current PPOR for the deposit and a new loan on the IP.

With the right approach, all the interest paid on the IP should/would be deductible.

I get the impression that the OP is not a big fan of debt.

I would suggest they educate themselves on the power of using OPM, educate themselves on the right financial structures/products (loans, offsets, I/O vs P&I, ...) and find a better mortgage broker (I don’t see any need for X-col and I don’t understand why their MB is suggesting it).

All of this is available to them on PC (if they use the search facility).

 

understand the frustration, but none of this matters. The market is what it is. You need to get past what you think should have happened and work on what you can actually do.

 

... and do it right this time.

For example, I have had loan managers from two different banks tell me that Offsets are the same as Redraws. They are NOT.

I had to educate them which is more than a bit scary .

 

You could put a solid gold toilet in, if the area doesn't have the comparables to support an increase in value, then it won't. Every suburb has a ceiling for a period of time, often regardless of what we put in. If we over capitalise, the market just won't reward us for it. At least not until prices start to move and market conditions become favourable to sellers.

 

Yes - I guess I put them in for the "right" reasons - not to "make money" upon sale of the PPOR but to act as a useful utility whilst I live here and make life better for the family. Was just surprised that it (seems to have) added no value. It wasn't the primary intention - but did surprise me. I guess I know better now!