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Own a free-hold rental property? A restructure of your mortgage could save you thousands [Case Study]

Property investor case study

Richard and Michelle moved out of their existing home and turned it into a rental property. Using the equity from this property they were able to buy a new home.

The equation

The rental property which was paid off had a value of $550,000.

Their new home cost $550,000 as well, and they borrowed the full purchase price.

This meant that they had 50% borrowing across the two properties.

The problem

All of their debt was on their new owner occupied dwelling and they had no debt on their rental property.

The rental property was making a profit that they had to pay tax on while at the same time they were paying a mortgage on their new home out of tax paid earnings.

The solution

In conjunction with the clients Accountant, they formed a ‘Look Through Company’ which bought the rental property from them at market value. I then went to the bank to apply for a loan in the company name of the full purchase price of $550,000. These funds were used to repay the debt that Richard and Michelle had in their personal names.

New situation

There is now no debt on their owner occupied dwelling and all the debt is now on their rental property.

The rental property income is enough at current interest rates to service the interest and other expenses.

When interest rates rise, any ‘top-up’ required for the property will be a tax deductible cost to Richard and Michelle.

In the meantime while interest rates remain low, which we have fixed for 3 and 5 years, Richard and Michelle are better off by an estimated $400 per week ($20,500 a year)

As there are many variables in a case like this, please contact me to discuss if you think that this may apply to you or someone who you know.

 

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