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Alternative strategy for first home buyers

The Scenario

Brad and Sarah are a professional couple with good incomes and excellent saving capacity.  Many years ago, they wanted to buy a home so they could get into the property market early in their lives.

They had saved a very big deposit and it seemed likely they would add more properties throughout their lives.

How they came to Vision

Sarah was referred to us via her brother who was an existing client and knew the Vision owners well from playing rugby together.

The main challenges

Sarah and Brad had significant savings when they came to Vision wanting to buy their first home.  Initially, they wanted to maximise their contribution, minimise their loan, avoid lenders mortgage insurance and pay off their home loan as soon as possible.

Sarah and Brad could pay this loan off very quickly BUT may like to keep the property as a future investment (as it was in a good area of Sydney).  We posed a number of questions to them which was about focussing on the future.

How long are you likely to live there?

What will your next home look like? How big will it need to be?

What do you want to do with your first property when you move? Sell it or keep it as an investment

A lot of people sell their first home in order to buy a bigger place, but Sarah and Brad’s savings pattern was so good, alternative strategies felt more suitable.

How Vision helped

We presented an alternative strategy to Brad and Sarah which required them to have a good understanding of:

Lenders mortgage insurance – yes it costs money, but provides benefits

Interest Only loans

Offset accounts

Negative gearing

What was done

The strategy that Sarah and Brad settled on involved:

They found a first home under $600k purchase price

They borrowed 90% of the property, paid Lenders Mortgage Insurance and minimised their contribution

The funds left over would be held in an offset account

Have an interest only loan which they DO NOT pay down– not even by $1

Where to now?

Within 5 years of buying their first home, Sarah and Brad wanted to move to a bigger home and keep their first home as an investment.  They had accrued ‘significant’ savings.  It was much better for them that those funds were sitting in their offset instead of their loan account.

They kept their first home as an investment

Their original loan had been ‘untouched’ so it stayed high and attracted a high amount of tax deductible interest which could be applied against the rental income

They are now employing exactly the same strategy on their new home

The strategy they adopted suited them and has created enormous advantages by having a lower loan amount on their current home and having a higher tax deductible loan on their initial property.

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