2nd home options

[hollywood3307]

Hi all looking for an opinion on our current financial position as we’re looking at upgrading our home.

Current assets: Townhouse in Wellington current value 800k with a loan of 590k. (CV 1M)

Cash: 240k

Salaries: 255k (bonuses not included) - stable jobs.

Kids: none

Option 1:
Retain property 1 to rent. Rental income per week should be 700 p/w as a base. BC, insurance, water and rates are 4.5 k p/y. We have pre approval for 1.2m while keeping this asset.

Option 2: Purchase property 2 with the conditional sale of property 1. Budget indication without property 1 is 1.5m and the quality of houses at this level is much better. The market is looking interesting with lots of options coming on and sitting for yonks.

Given the current climate and interest rates I’m unsure if it’s realistic to retain property 1 even with pre approval. It feels close to the wire and potentially risky although the retention of the asset sounds like a good idea on paper.

 

[tahitirun]

@hollywood3307 A well written question.
Both options appear to have similar cash flow costs.
Option 1 gives you ownership of $2 M worth of property and option 2 $1.5 M worth for future capital gain.
However in my city the higher quality homes have had much higher capital gain over the past.
Given the much higher quality and plentiful options- I would pick option 2 - consolidate - then look for other opportunities.
But it’s not a clear obvious choice.

 

[lilyheart]

@hollywood3307 Option 1, you have no kids, high and stable income. This is the time to purchase a second home. Once you have kids, then GG.

 

[thundergirl96]

@hollywood3307 I think what your question lacks is quality goals. What are the drivers for your long term decision? Do you want to grow wealth or an asset base? Or do you want a nicer property to live in and raise a family?

Assess your goals and develop options to suit.

That being said, if workable, I would prefer option one. More assists long term is always a winner.

 

[reversepolarity]

@hollywood3307 Have you run the numbers to see if you would be happy paying the mortgage on two homes?

 

[benzohar]

@hollywood3307 Retain property 1, and if interest becomes a problem down the line, you can always sell it at a later date

 

[ikon]

@hollywood3307 I think with your incomes you can afford to do option 1 if you want. It will be more expensive and probably cash flow negative in the short term but if you're treating it as a long term investment (say 10 years) then I think it would pay off as the capital gains will cover any short term losses.

Also as you pay down the mortgage balance, interest rates come back down (don't count on 2-3% rates though, I'm talking 4-6%) and rents go up - it will become cash flow positive at some stage.

 

[augustatrillyon]

@hollywood3307 Personally I would want to keep property 1 and rent it out

 

[san76]

@augustatrillyon Is keeping property 1 still worthwhile since you lose almost a third of the rent to tax unless it's a new(ish) build, so you will have to top up the repayments to continue to own it.

 

[lilyheart]

@san76 Well depends on when they bought it.

 

[hollywood3307]

@san76 Property 1 was purchased in July 2018. I believe this will quality for a 50% deduction then 25% the following year.

 

[lilyheart]

@san76 Here to play the long game

 

[sherylb]

@hollywood3307 Depends how much risk you want to take.

Honestly, in my opinion, I think you already have a fair amount of debt. If I were in your shoes I would sell the house and then buy another one if you need to upgrade. To carry less debt.

Debt is not at all appealing anymore. The low interest rate party is over and I cant see it coming back any time soon. People had it good with cheap and dropping interest rates from 2009 to 2021. Now we are in a different cycle. Seems time to consolidate and reduce debt to me rather than take heaps more on.

 

[ligm]

@sherylb I

 

[grey20]

@hollywood3307 You know second home you need 40% deposit right? If you retain house 1 and buy second. Which means with 240k cash you are looking at around 600k purchase limit even though your borrowing capacity from the bank is higher.

Are you making this move for upgrading to increase standard of living or you dont mind downgrading and keeping your house 1 for few more years till you can sell at good price?

In terms of retaining house 1 , 590k loan with 700pw really you should be perfectly fine. You are looking at around 15-20k per year extra from your pocket to maintain the house expense and some of this will be your principal anyway!

 

[misszelda]

@grey20 Why can’t they go to a different bank(other than the one that holds security over current existing property) and obtain approval for a new purchase with 20% deposit?

 

[grey20]

@misszelda https://mortgages.co.nz/guide-to-buying-a-second-home-in-nz/

Its the regulation enforced by the govt second property is considered investment unless you are selling current and buying new property. Thus second property you need 40% because bank can only lend you 60% by the regulation.

This was enforced so having multiple portfolios of investment is harder.

Unless you are lying on your application to the other bank.

 

[misszelda]

@grey20 I’m assuming they aren’t using equity to purchase as they have $240k cash and with their approval to purchase at $1.2m is bang on 80% LVR. You can use as many banks as you want to purchase property as people upgrade all the time and put down 20%. If however you use the same bank to purchase more than one property one will be deemed as investment and only then the 60/80 rule will apply as the properties and the lending is cross collateralised. They most certainly can purchase new property with 20% deposit.

 

[grey20]

@misszelda Where are you getting this from? Im sure that is not correct.
My parents has 5 properties i know last 4 were down with 40% deposit. They are across different banks.

On your application when you say that you own a property it becomes investment and by regulation is enforced for all reserved bank to follow the rule. Unless you are going third party lender.

This was enforced so that it is harder for investors(international and domestic party) to acquire too much properties.

 

[misszelda]

@grey20 I’m assuming your parents told the bank they were buying investment properties which then yes they have to put down 40% (“on the last 4 properties”) but this is not the case. Banks don’t talk to each other and it’s the actual occupancy that is key so if they are buying a property to live in and they want a mortgage from a different bank they only need 20%.

Mortgage adviser here.