The pitfalls of repurposing your home

If you are considering buying a new home and looking to turn your existing home into an investment property, there are important factors to consider.

First, you may need to access equity from your existing home to assist in being able to borrow enough for the new property. Always get the advice of an accountant on how to setup the loan. Make sure that the loan allows you to split up the amount you currently owe in from the equity you release for the new purchase. These separate portions will mean that the existing debt on your old home and debt to be used in the purchase of the new home is kept separate for tax purposes.  Keeping the debt separate for each property gives you the flexibility to utilise any potential for tax deductible interest in the future no matter which property ends up being an investment property.

Tax management is one of the biggest considerations for keeping your existing home and turning it into an investment property when you upgrade.  If you have paid off most of the loan on your existing home, it will have minimal debt. If you borrow against that property to help fund the purchase of your new home, the new borrowing is personal debt, even though the property used as security becomes an investment property.  Where the money that you borrow goes determines its investment character, not the security that is used.

What many people don’t realise is that you may end up with a very positively geared investment property and have to pay tax due to the lack of interest you can claim against the rent income. For this reason alone a lot of people end up selling their existing home, putting all the equity into their new purchase that they will live in. Then, once things have settled down after the big move, go out and purchase an investment property, borrowing the maximum they can for that purchase. This helps re-balance the equation so that all your equity is in the house you live in.
Depending how much equity you have you may end up being able to borrow the full purchase price plus costs on the investment property purchase giving you the maximum tax deduction for interest at tax time. It always pays to a chat with your tax accountant and get them to crunch the numbers so you can make an informed decision about how to structure your finances.

If you are buying your first home and you think that in the future it is likely that this property will become your investment property, then make sure your home loan comes with an offset account so that you can “park” your savings in a separate offset account rather than depositing it into the loan. This will enable you to get all the benefits of interest savings without actually reducing the total loan balance.  This means, that when you do end up “converting” the property to an investment, the loan balance is the original loan amount. (The loan purpose is not “muddied” by all your personal payments and redraws that you did whilst living in the property).  Speak to your accountant about how this can maximise your negative gearing benefits!

About Heidi Armstrong

Heidi Armstrong is the CEO for State Custodians Mortgage Company. Since founding the Company in 2006, State Custodians has grown to become one of Australia’s most respected non-bank lenders. Heidi holds a Law Degree, a Bachelor of Science and a Diploma of Finance and Mortgage Broking Management. An expert in personal finance, securitised lending and the mortgage industry, Heidi is passionate about sharing her invaluable knowledge to educate borrowers.

Widely recognised and respected by industry peers, Heidi was a finalist in the 2012 Australian Lending Awards for the Best Thought Leader. Moreover her Company, State Custodians, has received numerous awards, including Money Magazine’s 2013 Non-Bank Lender of the Year, a ‘5 Star’ CANSTAR rating on four of its main loans for six years running and the prestigious award for Best Overall Customer Service at the 2013 Australian Home Loan Awards (beating all of the major banks, credit unions and other lenders and mortgage providers for superior customer service).