Mortgage Advice for second house

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Forums › Finance and wealth management › Mortgage Advice for second house

Ipv89

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#282627 2-Mar-2021 12:08

Note: I am seeking professional advice however, I would like a general understanding of how this works.

We are planning to purchase a new house for our family and rent out the current house. The bank has approved this for us.

We own the current home outright and will leverage this to purchase the new house. My question is can I choose to leverage the current home for the maximum amount possible? i.e. 60% or does the bank usually choose how this is done?

Batman

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#2666751 2-Mar-2021 12:16

Yes you have the right idea.

But nobody here can give exact numbers as how much you think your houses are worth may not be what the bank think they are both worth.

Final numbers you need to check with bank.

eracode

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#2666752 2-Mar-2021 12:19

If the bank has approved the new loan, have they given you a letter or written confirmation of the approval? Their letter of offer should set out what the mortgage security is for the new loan. Depending on the respective values of the two properties and the amount of the loan, they could be looking for mortgages over either or both of the properties. Is this what you mean?

If one property is of sufficiently high value that it alone provides enough security value for the new loan, they may require a mortgage over only that one property. If that’s not the case, they will probably want mortgages over both properties. As @Batman says, it’s hard to be specific without knowing the numbers.

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BlinkyBill

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#2666760 2-Mar-2021 12:42

If I read this correctly, you wish to mortgage your current home, and use the loan amount to purchase a new home which you will live in. You will rent the current home.

If this is correct you will be subject to the new LVR’s and these will apply to the amount you are borrowing against the current home’s assessed value, as will the amount you will be able to borrow; and the bank will take your servicing strategy into account as well.

The mortgage arrangement in this scenario will have nothing to do with the purchase price of the new home, all of the considerations will be against the value of the current home and your servicing strategies. What the borrowed money is used for is irrelevant, albeit the bank will be interested to know you won’t be taking it to Vegas and putting it all on red.

You haven’t provided enough info for specific advice.

wellygary

8312 posts

Uber Geek

#2666770 2-Mar-2021 13:28

Ipv89:

Note: I am seeking professional advice however, I would like a general understanding of how this works.

We are planning to purchase a new house for our family and rent out the current house. The bank has approved this for us.

We own the current home outright and will leverage this to purchase the new house. My question is can I choose to leverage the current home for the maximum amount possible? i.e. 60% or does the bank usually choose how this is done?

Interest is a potentially deductible expense for a rental property.

BUT you need to structure the transactions properly so you end up with a transaction to purchase rental property and use a mortgage raised on the rental property to do this.... usually by selling the rental back to yourself, usually in the form of a company..

Get some professional advice on these transactions from an Accountant/Lawyer

BlinkyBill

1443 posts

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#2666816 2-Mar-2021 16:04

wellygary:

Ipv89:

Note: I am seeking professional advice however, I would like a general understanding of how this works.

We are planning to purchase a new house for our family and rent out the current house. The bank has approved this for us.

We own the current home outright and will leverage this to purchase the new house. My question is can I choose to leverage the current home for the maximum amount possible? i.e. 60% or does the bank usually choose how this is done?

Interest is a potentially deductible expense for a rental property.

BUT you need to structure the transactions properly so you end up with a transaction to purchase rental property and use a mortgage raised on the rental property to do this.... usually by selling the rental back to yourself, usually in the form of a company..

Get some professional advice on these transactions from an Accountant/Lawyer

Good lord. Interest is definitely deductible against rental income, the mortgage does not need to be raised on the rental property, and the rental does not need to be “sold back to yourself in the form of a company”.

Is useful to get the advice of an accountant, not a lawyer.

Ruphus

465 posts

Ultimate Geek

#2666842 2-Mar-2021 16:50

BlinkyBill:

wellygary:

Interest is a potentially deductible expense for a rental property.

BUT you need to structure the transactions properly so you end up with a transaction to purchase rental property and use a mortgage raised on the rental property to do this.... usually by selling the rental back to yourself, usually in the form of a company..

Get some professional advice on these transactions from an Accountant/Lawyer

Good lord. Interest is definitely deductible against rental income, the mortgage does not need to be raised on the rental property, and the rental does not need to be “sold back to yourself in the form of a company”.

Is useful to get the advice of an accountant, not a lawyer.

The info provided by @wellygary was the exact same advice my accountant provided me when we did the exact same thing the OP is intending on doing in Sept last year.

BlinkyBill

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#2666846 2-Mar-2021 17:10

Good on you Ruphus. I’m simply saying that that approach is not necessary/required (which was the tone of wellygary’s note); if you are going into professional landlording maybe it is, or maybe it’s appropriate for your circumstances.

But as a one-off proposition, seems like simply a good way for an accountant to increase his/her fees.

The reality is, running a single rental property is pretty easy from a tax perspective; indeed the IRD has lots of handy information available on its website to help you.

I have run rentals myself, all on my personal tax account, all fully financially managed by myself and signed off by my accountant. No longer though, because ... tenants.

However, take advice from an accountant, and ask for alternative approaches.

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eracode

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#2667018 2-Mar-2021 21:55

Ipv89:

Note: I am seeking professional advice however, I would like a general understanding of how this works.

We are planning to purchase a new house for our family and rent out the current house. The bank has approved this for us.

We own the current home outright and will leverage this to purchase the new house. My question is can I choose to leverage the current home for the maximum amount possible? i.e. 60% or does the bank usually choose how this is done?

@Ipv89 Going back to your original query: There are two main factors that the bank is looking at here - 1. the value of the security (a mortgage over your current home in this case) and 2. your ability to service the proposed loan. Their criteria need to be met on both of these.

If you are subject to a 60% Loan to Valuation Ratio (LVR), this sets the upper limit of the amount you can potentially borrow.

If you have tons of income (and bear in mind that the bank will allow part of the new rental income to be counted as part of your overall income) and can easily service the proposed loan from step 1. above, they should be willing to lend that amount to you. This means you can leverage the maximum amount possible.

If the serving is tight, they may offer you a smaller amount, at which they are comfortable with your servicing ability.

Sometimes I just sit and think. Other times I just sit.

eracode

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#2667580 4-Mar-2021 07:56

@lpv89 Any thoughts after seeing how people have responded to your original query?

Sometimes I just sit and think. Other times I just sit.

blackjack17

1705 posts

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#2667588 4-Mar-2021 08:27

What will typically happen is you will put 100% of the value of the rental on the rental on an interest only. The balance will be on your owner occupied. As long as the total value of the mortgage is not greater than 80% of the OO and 60% of the rental you will be fine.

Interest onlys are typically for a max of five years. In that five years you will want to clear as much of the OO mortgage as you can. After five years restructure transferring some of the rental mortgage back to OO and repeat.

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concordnz

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#2667609 4-Mar-2021 10:12

If both properties are mortgaged to the same bank,
You can 'apsolutely' specify how much mortgage you want against each property. (up to LVR limits.)

How it normally works, is as fillows.
1) You talk to your accountant
2) Your accountant tells YOU how he wants it structured
3) You TELL the bank how you want it structured.
4) They draw up the loan documents, in line with what you requested.

Its reasonably important you get it structured right 'first time' - it can be very hard and cost a lot of fees to restructure mortgages 2 weeks after you have signed everything and started paying repayments.