When it’s time to buy a second home – be it as an upgrade, a holiday home or an investment property – it’s quite different to buying your first.
In many cases, you might be in a better financial position than you were when you bought your first home. However, some of the benefits of buying a second home, such as buyer’s grants from the government, no longer apply. That doesn’t stop 7.9% of all Australians owning at least one investment property. (27.2% of property investors own more than one!) The home loan experts at Savvy Finance have put together this guide so you know all you need to know about buying a second home.
- Anticipate cash flow
By doubling your mortgages, you aren’t necessarily doubling your cash out each month – it’s not that simple! But the truth is you will need to service an additional loan with some sort of income. You have to prove to a lender that you have sufficient income to pay off two loans with the resources you have. You should budget and know what your cash flow might look like once you take on another loan.
- Save up a “contingency” fund, or a deposit
Just like buying your first home, you should save a deposit to offset how much you can borrow. You should also have money set aside for a contingency fund, in case you or your partner is out of work or unable to work for an extended period. A good fund should have at least three months’ mortgage repayments, living expenses in it, with an aim to extend this to six months. This gives you breathing room to keep on top of your debt obligations while looking for alternative sources of income.
- Estimate rental income
You should get a rental income estimate before approaching a bank or lender with a plan to borrow. You can obtain a rental income estimate from a real estate agent. Note that a bank or lender will only figure 50-75% of your estimated rental income will service the new loan. You should aim for a growth area, so lenders look favourably on your plan.
- Think about refinancing
Just because you’re with one bank or lender doesn’t mean they’ll approve you for a second loan. Right now, interest rates are at all time lows. You should figure out if refinancing your current loan and applying for a second loan could save you more than sticking with your current lender. An accountant or financial professional can help you with these calculations.
- Can you tap into your home equity?
If you’ve lived in your current home for at least three to five years, you may be able to tap into your home equity to borrow funds for a new property. Talk to your bank or lender to figure out if you have sufficient equity in your home.
- Consider “professional” packages
Some lenders or brokers may suggest professional packages or “pro packs” as they’re called in the industry. Pro packs are a fee-based offset to your mortgage. Some pro packs might require you to pay an annual fee of $300 to save around 0.7-1% off the standard variable rate of your loan. Pro packs may include lines of credit, discounted offset accounts, fee waivers or free valuations and various insurance premiums.
Before looking at second home loans, you should always consult with a financial professional.