RBA rings alarm on high debt levels
Risks to financial stability could be building as house prices and debt levels keep rising, the Reserve Bank has caution...
Q. I am 23 years old. I currently live at home and have $150,000 in the bank. I am looking at buying a place to live and then an investment property. How should I structure my finances if I start to buy more than one property?
A.I will assume your borrowing capacity is not an issue for you when buying these two properties, so the strategy will be dictated by how aggressive you want to be and the amount available to fund the acquisitions – i.e. the $150,000 savings.
Option 1 – the safe option – is to buy your home first with an 80 per cent loan, park the rest of your savings in an offset account and wait until capital growth kicks in. At this point you can release the newly created equity to fund the acquisition of an investment property.
Option 2 is to do the reverse. Buy the investment property first and stay at home. In this case, I would borrow 90 per cent on an interest-only basis and park the rest of the savings in an offset account. When you have enough equity/savings, you then acquire a home (or another investment property!)
Option 3 is the aggressive approach. It consists of acquiring both properties at the same time by borrowing 90 per cent or higher, depending on the purchase price. You will be left with little savings but you would have two properties in your portfolio, which at 23 is a great achievement!
The above options are only the start of your journey. If you end up with non-tax deductible debt (your home) and tax deductible debt (your investment property) as described above, there are a number of ways to optimise the management of your day-to-day finances over time in order to optimise your wealth creation – but this is another subject altogether!
Philippe Brach, CEO, Multifocus Properties & Finance