Why sell PPOR when you have equity?

[jmillar]

A quick question for the MBs and other forumites..

A couple family members of mine in the last 12-18 months have been in this situation and I'm baffled as to why they've done what they've done. I'll outline the situation of one of my family members briefly..

- married couple with 2 kids
- combined income easily $150k + (not the kids)
- very good savers
- PPOR worth around $450k (not sure of LVR but it would have been under 70%)
- drive very modest cars. Own no other properties or major assets.

They sold their house for around $450k so that they could buy land and build elsewhere. They only paid ~$300k for the land and $300k for the build so not a great big jump.

Their house sold straight away and now they are renting back and have been for 12 months, with another 9 months before the house is finished. They are paying more in rent than they were on the P+I repayments.

Now why couldn't they just pull out the equity in their existing PPOR to buy the land and pay for the build? They would have access to the same amount of cash/equity (they would only access say 80% of the equity.. but they lose some of their equity when they sold due to agents fees, legal fees etc anyway so they didn't get access to 100% of it), they would be paying off the property and it would have been more cost effective than renting, and in the meantime their property has increased by $50k or more so they would have received those gains as well.

Have they just received very bad advice from their bank/broker? Or am I missing something blatantly obvious here?

Cheers

 

[alexlee]

Some people just don't like debt. Maybe the idea of having two loans scared them.

 

[starter]

Could be for tax restructuring as well. If they didn't have an offset account on the original PPOR, extracting equity for the new PPOR would make that part of the loan all non-deductible.

 

[Mick C]

^ As mentioned

1. Either scared of debt ( even tho IP are "good" debt)
2. restructure and debt recycling for tax reason ( unlikely since they are going from PPor to another PPOr)
3. bad advice, they probably didn't know they could draw out equity? so thought they had to sell to access the funds
4. servicing issues? ( unlike from the numbers you have given)
5. The property was a bad investment in the first place, and they probably didn't see any future capital gain benefit or rental benefits etc..

Personally...like most investors i would recommend them to keep it and live in the property while their PPOR is being built and if the property is considered a good investment - rent the property out

 

[perthguy]

I sold my PPoR last year because it was CGT if I did it then and would not have been if I sold it this year. Plus my tenant left and I could not be bothered finding another one, plus the strata manager was a PITA, plus the market was up in the area at the time and I made a nice CGT exempt windfall

 

[Rolf Latham]

Perception of risk usually.

I know us folks say "wrong" but in reality, I have found there is no right or wrong, only a personal way.

ta
rolf

 

[jmillar]

Thanks for the responses guys. Some good points as usual.

It certainly wouldn't have been what I would have done - I would have extracted the equity, continued living in it (paying it off was cheaper than the rent anyway) and hold on to it since the market was only starting to take off at the time..

I guess it was the perception of "risk" that made them do what they did. Just wanted to make sure I wasn't missing something obvious.

Cheers

 

[Dimsh]

In my opinion the best approach for them would have been to use their savings (if any) to build the new property, refinance the current one at 90% LVR and use proceeds to buy another one or two investment properties.

Some people say there are no right or wrong decisions, only the ones that you are comfortable with. I disagree- in pure financial terms there are decisions that increase your wealth and there are decisions that decrease it so the correct decision is the one that provides the maximum outcome given circumstances.

On another note - if the house was really bad and had no CG prospects and they could not fix it then selling it was probably a good idea.

 

[CHAOS]

Sometimes a lack of knowledge

We sold our PPOR in 2010. It was fully paid off. We had an offset but when the amount in the offset became to high I put the money off the loan. (People can steal from your transaction account / harder to steal from a loan mentality).
Interest on a PPOR is not tax deductible so they only way we knew to reduce our interest bill was to sell and pay down new PPOR.
We had a bridging loan for 3 weeks and again we put the cash off the new loan instead of parking in the offset. Essentially we only wanted a small loan - the difference between sell and buy costs.

We know now how we could have done things differently and how we could have kept the house. At the time it was the right decision.