mortgage strategy questions Rental + family home

[Petrolhead]

Hi All

New here and need some advise. I've searched the web and I can't find a clear answer which makes me think there isn't one so I thought I'd ask.

We have just brought our 2nd Home which we are moving in to. We are keeping our first home as a rental as it's in a high demand area in Chc. We are going to sell it to a LTC that my wife and I own 50/50 and the bank will give us 100% of it's value. We aren't after capital gains and negative gearing is not really what we are after as we want it to end up generating us an income when we are older.
I understand that things change and we might end up selling it.

My question is what's the best way to pay off this debt?

The rental house is valued at $360K, we owe $22K on it. The new house is $695K total debt is $717k. We have $3K per fortnight to service the debt.

What's the best way to structure this to pay it off the fastest?
Should we focus on paying off the family home while still eating in to the principle of the rental to maximise the tax benefits?
Should we split it down the middle as the debt will be roughly halved across both properties?
Should we focus on paying off the rental and getting it to generate an income?

Thanks for your time!

[TheLiberalLeft]

Not entirely sure if it's your question, but you did bring up tax, so I'll say it anyway... you do realise that only interest on that $22k of that total mortgage is claimable as a rental expense, right?

[TheLiberalLeft]

Hang on - you on-sold to a company. Scrub that. I'm going blind.

[Jimmythepants]

My wife and I are in pretty much in the same situation. We have borrowed 100% of the equity in the rental LTC and put this into mortgage for the PPOR.
Solely for for tax purposes as TLL mentioned because you can claim tax against the interest on that mortgage.

There maybe a few difference between our financial situations but I believe that to the best cause of action.

Such as
rental making loss/profit
your personal tax bill
Are both directors working/paying tax on personal income

[NovInvestor]

Maximise the mortgage on the first home (now rental), and use that to pay into the PPOR to maximise tax efficiency.

To pay it off, well my personal recommendation is to buy a 3rd rental (or 4th), hang on for a few years, and when property prices have gone up more, sell the 3rd, and use the profit to pay off 1st and 2nd.

[Petrolhead]

Thanks Jimmy.

how/what are you paying off?
Is it the PPoR, the rental or a bit of both?

I'm trying to find out what's the best way to utilise the $3k to pay them both off the fastest.

My wife and I are in pretty much in the same situation. We have borrowed 100% of the equity in the rental LTC and put this into mortgage for the PPOR.
Solely for for tax purposes as TLL mentioned because you can claim tax against the interest on that mortgage.

There maybe a few difference between our financial situations but I believe that to the best cause of action.

Such as
rental making loss/profit
your personal tax bill
Are both directors working/paying tax on personal income

[NovInvestor]

Pay off PPOR first, then rental.

[Petrolhead]

Thanks for the advise, we might buy another rental but for the next 2 years I want to get the existing mortgages down as best we can. The Bank suggested an interest only on the rental but that just feels wrong to me.

Maximise the mortgage on the first home (now rental), and use that to pay into the PPOR to maximise tax efficiency.

To pay it off, well my personal recommendation is to buy a 3rd rental (or 4th), hang on for a few years, and when property prices have gone up more, sell the 3rd, and use the profit to pay off 1st and 2nd.

[NovInvestor]

Thanks for the advise, we might buy another rental but for the next 2 years I want to get the existing mortgages down as best we can. The Bank suggested an interest only on the rental but that just feels wrong to me.

Your bank is right on this one.

If you have extra cash, pay off PPOR as soon as you can, and leave the mortgage on rental alone until you pay off PPOR.

Reason is your mortgage interest on PPOR cannot be used to offset your income, while the interest on rental can.

[Petrolhead]

That just feels wrong, but I guess it's all how I'm looking at it (which I think iss the problem here). I suppose the fact of the matter is that there's a large chunk that we aren't going to touch in that 2 years and we are effectively paying interest only on it any way you look at it. Just because the rental has a mortgage buy it's self it makes makes no difference to the speed of payment if it spends a few years interest only. ....right?

Your bank is right on this one.

If you have extra cash, pay off PPOR as soon as you can, and leave the mortgage on rental alone until you pay off PPOR.

Reason is your mortgage interest on PPOR cannot be used to offset your income, while the interest on rental can.

[NovInvestor]

That just feels wrong, but I guess it's all how I'm looking at it (which I think iss the problem here). I suppose the fact of the matter is that there's a large chunk that we aren't going to touch in that 2 years and we are effectively paying interest only on it any way you look at it. Just because the rental has a mortgage buy it's self it makes makes no difference to the speed of payment if it spends a few years interest only. ....right?

To make you "feel right", my wife and I have 10 properties, 9 are rentals and are on interest only, and principal on PPOR.

In fact we have moved our PPOR mortgage over to the LTC also.

Any accountant will tell you to pay off PPOR first, before reducing the mortgage on rental.

[Petrolhead]

I'm about to go to an accountant but I want to be up to speed before talking to him. If you haven't guessed I'm a bit old school I got a house, paid it off, now I'm getting another rinse and repeat. I should have this paid off by the time I'm 52 then we'll probably get another depending on how it goes.

So are you hoping the market climbs enough that you will sell them and make more profit than they have costed you over the time you owned them?
I don't see how owning 9 properties and not paying off the principle gets you any where other than paying the bank a lot of interest? ....what am I missing here?


What am I missing here?

[Jimmythepants]

Thanks Jimmy.

how/what are you paying off?
Is it the PPoR, the rental or a bit of both?

I'm trying to find out what's the best way to utilise the $3k to pay them both off the fastest.

Rental is on an interest only mortgage. 2 year fixed.
PPoR is on a split mortgage of fixed portion and a revolving credit portion. We are repaying as much as we are permitted on the fixed portion and are obviously trying to reduce the revolving credit as fast as possible.

All of this was advice gained through an accountant, I was in the same mind as you about the interest only option on the rental but have been advised multiple times that for us this is the best way to do it.

[Petrolhead]

I thought there must be someone on the same boat as it were.

How did you decide the ratio of fixed vs revolving?

I'm not saying everyone one is wrong and unless I find something that proves I shouldn't I'll be going down the same path as you. I'm a practical guy I'd like to see the how and why.


Thanks Jimmy =-)

Rental is on an interest only mortgage. 2 year fixed.
PPoR is on a split mortgage of fixed portion and a revolving credit portion. We are repaying as much as we are permitted on the fixed portion and are obviously trying to reduce the revolving credit as fast as possible.

All of this was advice gained through an accountant, I was in the same mind as you about the interest only option on the rental but have been advised multiple times that for us this is the best way to do it.

[Jimmythepants]

I thought there must be someone on the same boat as it were.

How did you decide the ration of fixed vs revolving?

I'm not saying everyone one is wrong and unless I find something that proves I shouldn't I'll be going down the same path as you. I'm a practical guy I'd like to see the how and why.


Thanks Jimmy =-)

It was a very scientific process worked out about 3 seconds after the bank manager asked us

The first time we fixed was for 18 month term, so we thought how much do we think we could save in that time and that became our revolving credit limit. We then made pretty much the minimum repayments on the fixed portion (just added like $50 or something). Please to say we just about paid of the revolving credit but looking at what we spent through that time we should have smashed it.

The second time we fixed was about 6 months ago and as per the previous statement we decided to take out the same amount of revolving credit but also pay the maximum the bank would let us of the fixed portion as the bank also said if this went pear shaped we could reduce it. This has been working well for us as we dont have that money to spend and the balance is reducing quickly while we are also still focused on the revolving credit. I'm sure its horses for courses but it seems to be working for us, or at least reining in the spending.