Using home equity question

**dazzler** · 12th December 2021, 07:51 PM

Howdy

I have an online meeting with the bank on Thursday but wanted some info before so I dont sound like a dill and understand the process a bit.

Here’s the scenario.

Say our house is worth $1.5 million.
We owe $200k on it.
We want to keep the house purely as an investment, and use the equity to buy another house to live in outright.
Putting aside fees etc, we need to maintain an LVR of 80%.
I figure this means that we could take back up to $1.2m less the 200k owed which means we should be able to access $1m of our own money for the new place. We wouldn’t need this much but theoretically that would be the amount.
Is this correct?

Say we did this, when the new loan is approved I imagine the equity - the $1m - can sit in the mortgage account and offset much of the interest?

In other words, if I do refinance to 80% LVR, and just leave the equity sitting there, other than loan application fees I would really be no better, nor no worse off? The current repayments would stay the same?

Our incomes would cover any negative geared costs with the investment property - ie we can afford the current house as an investment.

Cheers and hope that didnt sound too dopey

**Beardy** · 12th December 2021, 08:20 PM

A few things to consider from what I know

-The LVR is only part of the equation, they will also look at your income to demonstrate that you can service the loan.
-Can you get a deposit interest rate to match your home loan rate? Term deposits are not paying much these days
-If you take a mortgage offset style loan they will still require you to pay the full amount of the loan regardless of how much cash you have in the offset account and your offset cash will be used to reduce the interest charged but the full payment you are making will go towards reducing the principal amount quicker.

**dazzler** · 12th December 2021, 08:30 PM

Hi Beardy

Thanks for your reply.

We can finance the repayments even at the full mortgage repayments on 80%.

Cheers

Homer

**yvan** · 13th December 2021, 07:45 AM

Another issue will be the bank's own valuation on your current property.
Bank credit policies current at the time will affect their valuation method and it is most likely theirs will be lower than actual market value.

Cheers,
Yvan

**Beardy** · 13th December 2021, 08:10 AM

Originally Posted by yvan

Another issue will be the bank's own valuation on your current property.
Bank credit policies current at the time will affect their valuation method and it is most likely theirs will be lower than actual market value.

Cheers,
Yvan

True, if you engage a valuer to do an appraisal they will ask if you want a bank or market valuation

**Fuzzie** · 13th December 2021, 12:15 PM

Be aware that borrowing against an investment property to purchase your new principal residence has tax implications. The increase in interest you end up paying on the redrawn mortgage on the investment property will not be claimable as a tax deduction against its rental income as it is not being invested to produce income.

**LanceC** · 13th December 2021, 04:08 PM

Make sure you talk to a financial advisor in addition to the bank manager. I recall reading something about the tax office taking a negative view of people transferring existing assets into an investment liability for the sake of negative gearing. So if you did go down that route, you would need to be positive that what you're doing is done in such a way as to be overtly above board. Again, a financial advisor would know the detail and advise accordingly.

**dazzler** · 13th December 2021, 05:07 PM

Thanks Yvan. Will keep that in mind.

Fuzzie you are a real party pooper LOL.

Plus I imagine NSW will hit us with some sort of tax if we sell post rental.

Lance, thanks for your suggestion. It is such an awesome house by the coast but doesn’t meet our ongoing needs sadly, hence the idea of keeping as an investment. But, maybe it just needs to go and look at funding something else as an investment.

Appreciate input.

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