Buy, Buy, Buy

Question from Tanya updated on 15th August 2011:

My husband and I own two houses: the first is mortgage-free and tenanted, the second is our family home with a small mortgage that we intend to pay off within one year. We are looking at buying a third house in a better location. To buy it we would have to borrow approximately $450.000.
From the financial perspective what is the better long-term strategy:
1. Sell both houses and be mortgage-free
2. Sell one house and have one income property and a reasonable size mortgage
3. Not to sell at all, but to borrow?
Thank you.

Our expert Kris Pedersen responded:

The fundamentals are starting to suggest that either next year or the year after house prices may start increasing again, particularly if you live in Auckland. For that reason I would recommend that you definitely look to hold onto what you have and I do think now is a good time to continue to accumulate.

My preferred way of structuring you would be having no debt against your own home except for a revolving credit which you would use for deposit funds. The bank you would do this with would be Bank A. I’d then be recommending that you borrow the remainder of the funds to complete the purchase from Bank B. This way your investment debt is kept away from the equity in your own home.

By using the right asset protection structures you are then safeguarding your home. If you can imagine drawing a line along the middle of the page you want to have as much wealth as possible on one side and the debt on the other. The aim then is that you should be aiming to pick the new property up at a discount to what its actual market value is.

Banks will lend against the lower of the purchase price or registered valuation meaning that this does not benefit you that much at purchase date. 6 months after purchasing though the lenders will lend directly against registered valuation meaning that if you have managed to acquire the property at a sufficient discount you can then top up and pay back the revolving credit effectively meaning that you then have no debt owing on the revolving credit facility. If you don’t purchase at a large enough discount this is still the strategy I would recommend. You would just have to wait for prices to rise before you could do this

Also often when a mortgage is paid off the bank will actually leave the encumbrance lodged against the property. If your current rental property is with the same bank as your own home make sure to check with your solicitor that this has been removed. 

Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies.

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