Mercy reaches her ... Debt limit

Q We are a young family with two kids and planning a third. My husband is 34 ($83,000pa, $45,000 super), I’m 32 ($75,000pa, $20,000 super). We own our residence, value $1.2 million ($785,000 loan with offset available). We have two investment properties valued at $850,000 ($600,000 mortgage) and $650,000 ($500,000 mortgage), negatively geared. What is the best thing to do with the available $785,000? More investment property? House or apartment?

A It’s clear you’re very keen property investors. With more than $1 million worth of investment property debt, two kids and possibly a third on the way, this might be time to slow down. I’m always pleased to see Australians making sensible investment decisions that help build wealth but you always need to be aware how much debt you can comfortably service. Your home being fully paid off is a great start. As for the $785,000 offset account, I would leave it alone. You have $1.1 million in investment loans, more than seven times your gross salaries, excluding rent, so a significant part of your incomes must go towards helping service these loans.

What would happen if you lost a tenant, one of your jobs, or both? I appreciate the safety the fully owned home gives you – the trick is not to be too conservative or aggressive.

You could take some or all of the $785,000 and buy another property. The good news is your assets are greater but your debts are around $1.9 million. This will be great if rates fall and property grows in value, but a disaster if the world gets messy again. Me? I’d leave the offset account alone and top up super via salary sacrifice. This is a good option from a tax viewpoint, and spreads your risk away from property. Do seek specific advice.

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