Interest Only- Realistic Option?

Hi,

My partner and I recently bought an apartment. We are both first time buyers. The apartment cost 270,000 and we took out a mortgage for 248,000. We bought off the original plans. The same apartments in the third and fourth phase are selling for 325,000.

We are thinking of staying put in the apartment for a year and early 2008 looking for a house. Would it be possible to rent out our apartment and take out an interest only mortgage for about 400,000 for maybe a five year term to buy a house. The plan then would be to let the rent pay off the first mortgage for those 5 years after which we would then sell the apartment, hopefully making at least 80,000 profit. Added to the amount the mortgage would be reduced during this period this would mean we would have to borrow a lot less than the actual value of the house to repay the interest only mortgage option.

Is it even possible to get a 100% interest only mortgage and is it possible to repay it partly with another mortgage?
Would there be any tax relief issues or issues because we bought the apartment with no stamp duty, but only a year later are using it as an investment property?
We realise that we would need to have money in reserve to pay any shortfall between rent- mortgage and any periods the apartment was not rented- but overall what other sort of problems would occur with the above plan?

francesmc said:

We are thinking of staying put in the apartment for a year and early 2008 looking for a house. Would it be possible to rent out our apartment and take out an interest only mortgage for about 400,000 for maybe a five year term to buy a house.

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When? In 2008?

The plan then would be to let the rent pay off the first mortgage for those 5 years after which we would then sell the apartment

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Don't forget that you can offset interest on the amount of the loan outstanding at that stage against rental income but not on any topup amount used for other purposes (e.g. buying a new home); rental income will be assessable for income tax, there will be a clawback of stamp duty if you rent out within 5 years of purchase as an owner occupier, some portion of the eventual resale gain will be assessable for CGT if you hold onto the property for more than 12 months after vacating it as your PPR etc. All this stuff is covered many times in other threads on the same sort of topic.

Is it even possible to get a 100% interest only mortgage and is it possible to repay it partly with another mortgage?

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I don't understand this bit.

Would there be any tax relief issues or issues because we bought the apartment with no stamp duty, but only a year later are using it as an investment property?

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Yes - see above.

francesmc said:

Hi,

My partner and I recently bought an apartment. We are both first time buyers. The apartment cost 270,000 and we took out a mortgage for 248,000. We bought off the original plans. The same apartments in the third and fourth phase are selling for 325,000.

We are thinking of staying put in the apartment for a year and early 2008 looking for a house. Would it be possible to rent out our apartment and take out an interest only mortgage for about 400,000 for maybe a five year term to buy a house. The plan then would be to let the rent pay off the first mortgage for those 5 years after which we would then sell the apartment, hopefully making at least 80,000 profit. Added to the amount the mortgage would be reduced during this period this would mean we would have to borrow a lot less than the actual value of the house to repay the interest only mortgage option.

Is it even possible to get a 100% interest only mortgage and is it possible to repay it partly with another mortgage?
Would there be any tax relief issues or issues because we bought the apartment with no stamp duty, but only a year later are using it as an investment property?
We realise that we would need to have money in reserve to pay any shortfall between rent- mortgage and any periods the apartment was not rented- but overall what other sort of problems would occur with the above plan?

Click to expand...

The way you're thinking of doing this is all arseways. IF this is what you want to do then:

Go interest only now on your existing property and save the difference you're currently paying in a high yielding deposit account. Use this against your new property.

When you're getting your new property get a completely seperate mortgage, secure it against your apt but that's all.

You will then have to pay stamp duty clawback on your apt and transfer your TRS allowance to your new PPR. You will have a CGT bill when you eventaully sell the apt, assuming it's after 12 months of it ceasing to be your PPR. You must register your tenancies with the PRTB.

The income from your apt can then be offset against the interest that you're paying on the apt. If you keep reducing your existing mortgage you may not be able to offset the entire rental income against the interest you're paying, leaving you with an annual tax bill on your rental income.

Goes without saying but: Interest only mortgages never reduce the amount owed. You may not be able to get mortgage approval for 2 sizeable mortgages irrespective of the "capital appreciation", it's your ability to pay that is taken into account. What you should be looking to do is to find the route which leaves you with the smallest tax liability, this isn't necessarily the easiest route or the route advised by the bank looking to sell you a mortgage.