Stepping up options

Question from Cordelia updated on 24th June 2013:

We own a seven-year-old townhouse in Christchurch. We paid $405,000 and owe $280,000 on it. We’ve had a rental appraisal on it for $650 per week (good school zones etc). We want to get a larger home for ourselves and would need to spend $500,000 to $550,000 to do this. Our income supports this also. How do we work out whether renting it is the best financial long or medium term option? It feels attractive to have someone else pay off a mortgage while we are doing the same but are we better in the long term to concentrate all earnings into paying off our own mortgage?

Our expert Kris Pedersen responded:

It comes down to what you think will happen in regards to the value of the townhouse and the rental returns over time. With the obviously supply issue it is likely that you will experience growth in both. While you state what you paid you haven't mentioned what you think it is worth now. If you look to retain the property I'd be recommending to split your lending so that you have the townhouse with one lender on an interest only basis and then look to pull out as much equity as possible without incurring low equity fees (generally up to 85% of the value of the townhouse) and put that into the new owner occupied purchase. You want to then focus on reducing debt on your own home so direct any principal payments at the new purchase.

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

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