Senior financial planner at Omniwealth, Andrew Zbik has warned that those who hang onto old properties as investments could run afoul of non-deductible debt policies.
Speaking as a fee-for-service planner, he said: “I have many clients who are in their 30s. Many of these clients made their first step into the property market by buying a unit. It’s not just a unit, this unit is their home.”
However, as the family grows, so too does the need to upsize. Hopefully, this family now also has the income to support a larger mortgage.
With this in mind, he said: “Many clients say to me that they want to keep their unit that was previously their home as an investment property.”
However, he argued that “this is not a smart financial move”.
He gave the example of a couple who bought a $500,000 unit with a 10 per cent deposit. Most of the stamp duty was covered by the first home savers grant.
Ten years later the property is worth $850,000 and the couple has $367,000 left to pay off. The bank lends $313,000 using the unit as a security for a new home worth $1.5 million.
This means that if the couple keeps the old unit as an investment property and uses its equity to help purchase the larger home, the additional loan on the new home would be about $1.29 million.
“However, being a home, all the debt drawn from the equity in the unit and the new home loan is non-deductible debt,” Mr Zbik said.
“Thus, the weekly loan repayments on the new home are a whopping $2,211 a week at 5 per cent interest rates and principle and interest loan repayments.”
This means by holding onto the old property, the couple are stung with a weekly holding cost of $82 after tax deductions.
“So the total exercise of keeping the old unit that was their home as an investment property and buying the new home has a weekly outgoing cash flow of $2,293 per week. OUCH!”
What if they sold the unit?
Mr Zbik said if the hypothetical couple choose instead to sell their unit and reaped net proceeds of about $457,500 – after real estate commissions and paying off the first home loan – then the cash proceeds could be used as a deposit on the new home.
That would be a nearly 30 per cent deposit.
“Remember too, selling the old unit is capital gains tax free as it has always been their primary place of residence. The new home loan repayments on the $1.5 million home are $1,589 per week. A saving of $622 per week,” he added.
“The most impressive part is that by selling their old home and using the cash as a deposit for their new home, the savings they will make in their home loan repayments on their new larger home over the life of the loan saves a whopping $890,000 in non-deductible home loan repayments!”
Further, if the loan has a loan-to-value ratio of less than 80 per cent, then the bank could also lend the couple more money for a separate investment strategy, he emphasised.
To Mr Zbik, it makes sense to consider the different scenarios.