Thinking about upgrading to your next home, but not sure how much you can afford?
Here’s two recent case studies that will show you some options and may surprise you.
Case Study 1
Samuel and Mel – Own their home and are wanting to upgrade a buy a new home for $1.2M but weren’t sure whether they should or even could keep their current home as an investment.
We met at their home on Saturday and discussed the pros and cons of the various options available to them:
- Keeping their current home and renting it out
- Selling and buying at the same time
- Selling first then buying.
With our comprehensive lender information we were able to assess each option and which lender would be best depending on which direction they went in.
Different lenders offer very different rates depending on the loan size and the final equity position of the borrowers. Samuel and Mel soon realised this would prove to be a very valuable exercise.
Option 1 – Keeping their home and buying new one
We estimated the rental income on their home would be $26,000 per year. Buy the new home for $1.2M and paying $56,000 in stamp duty would mean a new loan of $1,256,000. Interest only repayments on this new loan would be around $4,687.50 per month.
They would pay tax on the new rental income and would have few deductions due to the age of the property, whilst having no tax benefits for the cost of their new home. They were going to be under significant financial pressure as they would only receive $20,020 from the rent after tax each year and have $56,520 in repayments – a difference of $36,320.00 per year.
Option two – Buying and selling at the same time.
They could put an offer on the new home ‘subject to the sale’ of their current home. A $700K sale of their current home, minus real estate agent fees of 2.5% meant they would walk away with approximately $682,500 which could be used for the new purchase.
This meant they only needed to borrow $573,500 and pay interest of $2,150.51 per month.
With this saving of around $10,512.50 per year compared to Option 1 they can now look buy a cash flow positive investment property and correctly have the higher debt on this new investment which is tax deductible, which will help them reduce their private debt and mortgage free faster.
Case Study 2
Our clients were a married couple who wanted to upgrade from their current home into a more suitable property. However they didn’t want to sell their existing home because they felt there would be some good growth in the property market in the next 12 – 24 months.
Their equity for the new property was tied up in their current home and they did not want to cross collateralise the properties. The solution here was a new loan against their existing property with the current lender. This loan was for $96,000 and was used as a deposit for the new property worth $450,000.
Some important points here were that the loan of $96,000 took the borrowings on the existing property to 90%. However as the clients originally borrowed 90% against the property with the same lender, they received a credit for the original mortgage insurance amount that they paid. This kept the mortgage insurance on the increased loan to a minimum, and meant that they avoided mortgage insurance on the new property altogether as they only needed to borrow 80% ($360,000) – saving them a potential fee of $13,986 of the loan had been set up differently.
At the same time of the loan increase, we switched products and negotiated a 1.05% interest rate reduction on both their current loan along with the new loan. This interest rate reduction would save them a huge $691.25 per month which they likely wouldn’t have received from their bank without our intervention.
The clients were very happy as they now had a much lower interest rate, a brand new home and rental income coming in from their previous home.