Save for deposit or pay off the mortgage?

[sjkpark]

Hi,

I'm an accidental landlord/investor. Bought a house in AKL, got offered job in Wellington 2 days later, then moved down here and really liking it. I set up the house as an LAQC and currently on 5.95% 1-year fixed, interest rate only loan. Currently renting a very nice apartment in Wellington.

By the end of the year, I'm hoping to have saved about $40,000. I was originally planning to save so that I can buy a house in Wellington or wherever I end up in about 2 years' time. But I'm thinking, if they remove depreciation, wouldn't I be better off paying off the mortgage then once the property becomes cash-flow neutral, switching it to Family Trust?

Your thoughts appreciated.

[PC]

Buy a second rental.

Else you'll spend it on booze, birds and fast cars - and the rest you'll just squander. (Apologies to George Best).

[WGN ex-property manager]

Do Both

Restructure the mortgage once it comes off the 1 year fixed to have a part of it on revolving credit (which you can thus pay down whenever you feel like it, and draw back whenever you feel like it).

Thus you are "paying down the mortgage" and saving interest, but you can still use the money later as a deposit on a home (if that's the way you go) or on a second rental (if that's the way you go). Or, if you don't decide to buy you just leave the money in the revolving credit.

This all assumes you have financial discipline. If not you'll blow the entire revolving credit on booze, birds and fast cars - and the rest you'll just squander :-)

[CJ]

Agree with Robin. Paying down your mortgage is the best investment until you find a better investment option for it.

[spaceman]

x3 for Robin

[Tan]

I disagree - except for the bit about how easy it is to spend the revolving credit amount.

Sit down and work out if you can afford to keep the Auckland place (using a higher mortgage rate, say 8%) as well as a new place.

Keep the Auckland mortgage as high as possible and pay your personal one down. Over the years the Auckland one will increase in value and rents will increase, making the mortgage seem smaller and allowing you to ignore it and focus on your own place.

[WGN ex-property manager]

I disagree - except for the bit about how easy it is to spend the revolving credit amount.

Sit down and work out if you can afford to keep the Auckland place (using a higher mortgage rate, say 8%) as well as a new place.

Keep the Auckland mortgage as high as possible and pay your personal one down. Over the years the Auckland one will increase in value and rents will increase, making the mortgage seem smaller and allowing you to ignore it and focus on your own place.

Tan - I'd agree with you if he HAD a personal mortgage - but he's currently renting his PPOR.

[sjkpark]

Do Both

Restructure the mortgage once it comes off the 1 year fixed to have a part of it on revolving credit (which you can thus pay down whenever you feel like it, and draw back whenever you feel like it).

Thus you are "paying down the mortgage" and saving interest, but you can still use the money later as a deposit on a home (if that's the way you go) or on a second rental (if that's the way you go). Or, if you don't decide to buy you just leave the money in the revolving credit.

This all assumes you have financial discipline. If not you'll blow the entire revolving credit on booze, birds and fast cars - and the rest you'll just squander :-)

Sounds like a good idea - any suggestions on the amount that revolving credit should be set at?

[Viking]

If you pay down the rental mortgage as opposed to a personal mortgage then you
1.lose the tax deductions for the mortgage which you should keep.
2. If you re borrow to fund your own personal house the the re borrowing will not be tax deductible as it is for your personal use.
So stick with your rental loan. Buy another house to rent if you like, put the cash ina term deposit until you are ready to go. Remember you can always use the security gained on rentals as security for your own house but you cannot claim a tax deduction if any money is used to buy your own shelter.
Put your money to work in a tax efficient way, don't give it to the wastrels that are Govt. No 1 rule.

[sjkpark]

If you pay down the rental mortgage as opposed to a personal mortgage then you
1.lose the tax deductions for the mortgage which you should keep.
2. If you re borrow to fund your own personal house the the re borrowing will not be tax deductible as it is for your personal use.
So stick with your rental loan. Buy another house to rent if you like, put the cash ina term deposit until you are ready to go. Remember you can always use the security gained on rentals as security for your own house but you cannot claim a tax deduction if any money is used to buy your own shelter.
Put your money to work in a tax efficient way, don't give it to the wastrels that are Govt. No 1 rule.

Yeah... that was what I was wondering about as well, although if they get rid of depreciation whether point 1 would even matter.

Just to clarify my situation, my Auckland house will remain LAQC. I probably wont go back there to live. I'm saving towards another house (for me to live in), but as I am very happy with the current rental apartment I live in I might continue to rent and buy another rental.

Thanks

S

[WGN ex-property manager]

If depreciation goes then its still worth claiming interest on rental properties as tax deductible.

As for the size of the rolling credit....?

As a minimum : the amount you plan to pay down in 1 year. If the rest of the loan is to be fixed longer, then make it the amount you plan to pay down in <X> years.

Maybe add 20% in case you get lucky and can pay down more.

If you plan to keep the rest of the loan floating, then you might as well have the lot as Revolving Credit.

If you have poor financial discipline and are at risk of blowing the lot on a boat then I'd suggest none as rolling credit.

[Viking]

Rem,ember if you pay your loan down then any borrowing again will be non deductible unless used for business purposes.
Be very careful especially if offered an account that allows for you to use the credit of a floating mortgage which can be used to offset your personal expenses. If you pay personal expenses from an account that fluctuates then once the account has been used that redraw portion becomes non deductible and frankly is more hassel than its worth. Fine for a personal house but not for rentals or business.

[WGN ex-property manager]

Rem,ember if you pay your loan down then any borrowing again will be non deductible unless used for business purposes.
Be very careful especially if offered an account that allows for you to use the credit of a floating mortgage which can be used to offset your personal expenses. If you pay personal expenses from an account that fluctuates then once the account has been used that redraw portion becomes non deductible and frankly is more hassel than its worth. Fine for a personal house but not for rentals or business.

I agree.

Keep business business, and personal cash separate.

It's fine to park the spare cash in a rolling credit, but if it's personal cash and a business rolling credit then make sure you (or your lawyer) does a formal "loan" document from you to the business.

If you end up needing the cash for personal stuff (such as a home) you can simply do another bit of paper work and pay back some or all of the loan from the business to you.