I’m buying a new home and am considering using our existing home as an investment property. Are there any factors regarding the loan that should be considered?
Answer: You may need to access equity from your existing home to assist in being able to borrow enough for the new place. There are two ways to do that. First apply simultaneously for an increase on your existing loan and apply for a new loan for the new home.
Or two, apply for a new loan secured by both properties to secure enough to borrow what’s needed. Another factor to consider is if you use both properties as security for the one loan, that loan should at least have two portions. One part for the existing debt on your old home, which will become the investment property, and the other part for the debt to purchase the new home.
Keeping the debts separate for each property gives you the flexibility to utilize any potential for tax deductible interest in the future, no matter which property ends up being the investment property.
Finally you need to consider tax management. Talk to your tax accountant about this. Consider, if you have paid off most of your loan on your existing loan you will have minimal debt. If you borrow against that property to fund the purchase of your new home, the new borrowing is personal debt, even though the property used as security becomes an investment property.
Where the money that you borrow goes determines its investment character, not the security that’s used. So you will end up with a lot of personal debt, with very little investment debt.
As the tax deduction is one of the most important factors in an investment property strategy, the lack of tax efficiency in this strategy needs to be considered. Again have a chat with your tax accountant about it all.