Should I keep my family home when upgrading to a new home

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Interest rate announcement – November 2019
Last month, the Reserve Bank of Australia (RBA) reduced the official cash rate by 0.25% to a record low of 0.75% in an effort to help support employment growth and increase inflation. This month the RBA have left the cash rate on hold at 0.75% and continue to monitor the economy closely. The inflation rate is currently 1.6% which is below the RBA’s ideal range of between 2% and 3%.

Often, we have an emotional attachment to the home we live in. So, it’s no surprise that many of us would like to keep this home if possible when we move to the next one.

The problem is, it’s not always the right decision financially. That’s because emotional decisions may not the right way to make smart money choices. It’s important to understand the pragmatic reasons both for and against keeping and renting out your home.

John and Sharon’s current home is worth $600,000. They want to upsize to a home that’s worth $800,000 and would like to keep their existing home. They have $150,000 worth of savings in their home loan available as redraw and a loan balance of $300,000. This means they’ll need a loan of $700,000 for the new home. (Assuming the redraw has been used for the deposit and to fund relocation and purchasing costs.) They’ll also owe an additional $150,000 on their existing now-investment-property-loan that they can’t claim. If Charlie and Terri believe they can claim interest on this higher loan amount after the redraw, they’re mistaken. That’s because even if you redraw the funds from the home you’ll be renting out, the Tax Office looks at what the funds are being applied to. In this case, it’s the new home that’s not an investment. That means they’ll have $850,000 worth of ‘‘bad debt’’ ($700,000 debt and $150,000 redraw) and only $300,000 worth of ‘‘good debt’’ which is tax deductable. Chances are, given the small loan on their current home, the property will also be positively geared (rental income will be higher than rental expenses) so they’ll need to pay tax.

Instead, John and Sharon might consider selling their existing home and applying the equity of $300,000 to their new home. This means they’d have total OK debt of $570,000 (assuming selling and purchasing costs of $70,000). If they wanted to still have an investment property, they could use the equity in their new home to purchase an investment property. If they purchased a property worth $600,000 this would mean good debt of $620,000 (assuming purchasing costs of $20,000). You can assume the property would be negatively geared and they’d receive a tax deduction for the loss.

In the example above, there would be selling costs but no capital gains tax payable because of the main residence exemption. John and Sharon would also be converting $16,000 worth of interest every year from non-deductible debt to a tax deduction. The entire debt pool is the same, but in this example we’ve changed the split so that instead of having a large amount of non-deductible debt and a small amount of deductible debt, their deductible debt (or good debt) is higher.

Now, if John and Sharon genuinely believed there were financial reasons why they should hang onto their existing home then that may lead to a different choice. Perhaps the property might be sold to a developer, or the area is expected to boom because of infrastructure spending. However, for many people, they’re purchasing the second home in a similar area which means their property exposure has potentially become riskier because their property eggs are in the one suburb.

So, if you’re buying a home and thinking you might one day like to keep this as an investment, what should you be doing now? The obvious answer is not to pay down your debt faster than you need to. When you make payments to the debt and they’re sitting on the loan as a redraw, it’s hard to convert that debt to deductible debt in the future. Instead, make the minimum repayments only and use an offset account for any extra payments. The net result is the same, but the Tax Office doesn’t consider the offset payments as paying down the loan. This means when you withdraw them, it returns the entire loan balance to being deductible debt.

With many more of us are travelling and relocating for work, it’s more common for our homes today to become investment properties tomorrow. It’s important to understand what you should be doing to keep your options open and make smart decisions based on facts and not emotion.

Our Current Best Interest Rates

The best home loan rates we currently have available:

  • Variable rate of 2.80% pa (comparison rate: 3.29% pa)
  • 1 year fixed rate of 2.74% pa (comparison rate: 3.33% pa)
  • 2 year fixed rate of 2.74% pa (comparison rate: 3.31% pa)
  • 3 year fixed rate of 2.74% pa (comparison rate: 3.29% pa)
  • 5 year fixed rate of 2.74% pa (comparison rate: 3.26% pa)

Assumptions: <$400,000 loan, owner-occupied purchase, principle & interest, LVR < 80%.

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