Loan type question

[Anonymous]

From: Anonymous


Hi everyone,

I hope this question doesn't sound silly. Here goes...

My husband and I are currently living in and paying off our own flat. We have this plan to move out soon and rent our flat. We will then also rent ourselves, and will be able to claim 25% of the rent we pay on our tax return (so our accountant tells us) because my husband's company has set him up with a home office. In this way, we should be better off in the sense that we'll have more income to invest elsewhere.

The basic plan is to acquire as many growth assets (property and shares) as possible in 6 years from moving out of our flat. After that, we'll sell the flat (CGT free) and use the cash as a deposit for our
"dream home". But we'll leave those assets we acquired alone and let them just continue to grow (or add to them if possible).

Initially, we'll be using the equity built up in our flat to borrow money to acquire growth assets. My question is this...in 6 years time when we sell our first flat, what happens to the investment loan we took out against the flat? eg say I borrowed $100k as a line of credit against the flat to pay for the deposit for another property, or to buy shares. Once I sell the flat, do I have to repay this $100k as the asset which was "backing" the loan has now been sold?

I hope this makes sense.

Amy

PS Sorry to post as Anonymous, but I didn't want to give out my email address and get annoying junk mail.

 

[Sim]

Reply: 1
From: Sim' Hampel


It depends... generally the loan will need to be paid out when the asset securing it is sold. However certain types of loans are portable, in that you can take the loan and move it to a new property when you "upgrade". I'm not sure of the details about how this works... speak to your bank or preferably an independent mortgage broker.

Just be very careful with this type of stuff - the deductibility of interest may be affected by changing assets, if the purpose of the loaned funds changes... get some professional advice before proceeding.

 

[Rolf Latham]

Reply: 2
From: Rolf Latham


Hi Anon

Ill call you Mrs Flat ) so we dont get you confused with any of the other anons.

If you are going to use the equity growth of the flat as "deposit" money for more assets then you will find the flat will be "backing" a lot more than 100 k in 6 years time. Indeed it will most likely be geared to 80 % of its value if youre driving hard.

If you SELL the flat then obviosly the loan needs to be repaid UNLESS you have another asset of equal or greater value to substitute in its place. This could be the dream home if you have enough equity built up.

Ta

Rolf

 

[Anonymous]

Reply: 2.1
From: Anonymous


Call me Amy ROlf.

Just to clarify then, let's say I get a portable loan (as Sim suggested) of $100k backed by my existing flat. When I sell my flat in 6 years to buy my dream home, and if I have at least $100k equity in my new home, then I can use this new home to back the $100k loan.

Cheers
Amy

 

[Rolf Latham]

Reply: 2.1.1
From: Rolf Latham


Hiya Amy

Yes if that 100 k equity is accesible. For example

400 k property with 300 k loan has 100 k equity BUT only 80 of the total security amount is available without mortgage insurance, so .8 * 400 = 320 - 300 (existing loan amount) = 20 000.

Or at 90 % with mortgage insurance is 360 - 300 = 60 k.

Gets confusing doesnt it )

Ta

Rolf

 

[WebBoard]

Reply: 2.1.1.1
From: Terry W


Amy

If you are 'lucky' your new properties will have had enough captial growth in 6 years so that they will be able to stand alone with no other security.

eg $100,000 dep on a $400,000 property, $300,000 loan.

property grows 5% a year, so will be worth $520,000 (or more with compounding). You get a LOC for 80% = $416,000. You should have $116,000 extra-enough to repay the $100,000 LOC.
Of course property prices may stagnate over this period or even go negative!

Terryw