Which loan to pay down first

[ilusiv]

Hi all,

Have been reading these forums for some time, so thought it was about time to sign up and post a question.

Long story short, my partner and I have our own place, which is valued at around 410k. We have about 285k owing on a floating loan.

We have the opportunity to get ahead by moving in (for free) with family, and are looking to buy an investment property, using some of the equity in our home.

We are going to rent our current place for 450pw.

We anticipate buying another place - a unit most likely for somewhere between 300-350k (in Aucklands North Shore in a semi decent suburb).

Our combined income is somewhere around 130k, so servicability won't be a problem.

My question is, if we get a loan for 100% from the bank for the new IP (considering that both will be rented the current one will be an IP as well), which do we make higher payments on, and why?

Cheers,

Ash

[jedimaster]

Hi all,

Have been reading these forums for some time, so thought it was about time to sign up and post a question.

Long story short, my partner and I have our own place, which is valued at around 410k. We have about 285k owing on a floating loan.

We have the opportunity to get ahead by moving in (for free) with family, and are looking to buy an investment property, using some of the equity in our home.

We are going to rent our current place for 450pw.

We anticipate buying another place - a unit most likely for somewhere between 300-350k (in Aucklands North Shore in a semi decent suburb).

Our combined income is somewhere around 130k, so servicability won't be a problem.

My question is, if we get a loan for 100% from the bank for the new IP (considering that both will be rented the current one will be an IP as well), which do we make higher payments on, and why?

Cheers,

Ash

Hi Ash

From a tax perspective the interest on both properties will become tax deductible, so I don't think it matters from a tax perspective. So from a commercial perspective you would be wanting to pay down the loan with the higher interest rate.

[Tan]

If you are looking at possibly moving back into your place in the future, pay the other one down.

[Re@der]

i thought that tax deductiblity depended on why you took the loan out, not what it's current use is. ie if you took the loan out to buy a home to live in then it is not tax deductible. If this is the case you should always pay down this loan first before you pay any off your tax deductible loan.

[Neongreen]

We anticipate buying another place - a unit most likely for somewhere between 300-350k (in Aucklands North Shore in a semi decent suburb).

Hi Ash, welcome to PT!

Just a note here - the prices for the North Shore have risen significantly over the past 4-5 months, so you will need to add $100k to that estimate for anything decent(or anything at all, really).

Maybe trying out west? The prices are lower, but the rents are too unfortunately.

Cheers,
Neon

[Keys]

Higher interest loan

[ilusiv]

Hi Ash, welcome to PT!

Just a note here - the prices for the North Shore have risen significantly over the past 4-5 months, so you will need to add $100k to that estimate for anything decent(or anything at all, really).

Maybe trying out west? The prices are lower, but the rents are too unfortunately.

Cheers,
Neon

Yep, I'm aware thats happened, which is why I'm looking at Units which are still in that price range thankfully.

Would try out west but the only suburb I'm really familiar with is West Harbour.

[Rosco]

As Jedimaster has said, the interest on both loans will be deductible following the information you have put below.

If you are going to move back into one of the rentals, then when you move back in this interest will no longer be claimable. So if you are planning on doing that, then I would pay down the loan on the property you are likely to move back into.

If you end up buying a seperate new personal house (house 3), then if you borrow to buy this, then the interest won't be deductible. So you might want to look at restructuring your current house, to move the equity from the current house to house 3. Make sure you get tax advice on this and that it is done properly, as if done wrong the interest won't be claimable.

Ross

[spaceman]

i thought that tax deductiblity depended on why you took the loan out, not what it's current use is. ie if you took the loan out to buy a home to live in then it is not tax deductible..........

You thought wrong......just flip it around to make it obvious.

Buy an IP and loan is income producing therefore deductible......move into IP .....according to your thought the original purpose of the loan was for and IP and the current use makes no never-mind so the loan is still deductible even though the property is now being used personally and no longer generating and income...........make sense??????????

Cheers
Spaceman

[spaceman]

.

If you end up buying a seperate new personal house (house 3), then if you borrow to buy this, then the interest won't be deductible.

With a bit of forethought and planning you would be able to make the interest on any third house deductible even though you were living in it. While it is generally true that personal use isn't tax deductible it can be done.

Eg If a trust owns the property it is not you it is a separate "person". The trust can rent that property to whomever it chooses and if you pay market rent the trust may deduct any expenses incurred in deriving income as per normal......There is of course a little more too it than that, as you need to be aware of the rules around tax avoidance. Simply put the reason you have the property in a trust and are renting it can't be to avoid paying tax. Because that would be.........tax avoidance

Cheers
Spaceman