So you have worked hard and paid off your home loan. It is important to know a few of the pitfalls with this especially if you are thinking of making that house a rental property in the future.
Once a mortgage on a house is paid off in full, you cannot take a loan out against that house to turn it into an investment property. This will have ramifications about the amount of tax you pay.
Jane has paid out her home loan. However, a year later she decides to upsize to a larger house. She wants to turn her current house into an investment. Jane cannot take out a mortgage against her current house and transfer all the equity from her current house to her new house. She will have a mortgage over her new house which will be her principal place of residence and not tax deductible. Jane will be receiving rental income for her current property which will not have any interest deductions. In this case, the income will be high and taxable are her marginal tax rate.
Option 1 – Sell the property
If you sell your current property you can take the equity out of that house and invest it into the new house.
Option 2 – Mortgage offset account
Instead of paying your loan out in full, make use of a mortgage offset account. Which allows you to offset a portion of the interest you pay each month, paying down the capital quicker.
However, if you wanted to move any of the money in the offset account to another property you can with no restrictions. You would just start paying more interest on the loan. With this option you would still be paying monthly repayments but the interest portion would be minimal.
Option 3 – Transfer the house to a trust structure
By transferring it to a trust you can refinance the house and release the equity. This will also allow you some flexibility on where to distribute the income for tax purposes. The downfall of this option is that stamp duty will need to be paid on the transfer and the extra accounting fees each year for the trust.
As you can see this isn’t a simple situation. There are many options and you should receive professional advice on this.