Whatever your motives for purchasing a second property, there are several things to consider before re-entering the market. Securing your second home might be considerably more difficult than securing your first. Here's what you need to know about it.
Buying your second home is an exciting, but also daunting process. You’ve done it once before; what will be different this time?
You might think that buying your first property was a big deal – and you were right! But when you buy a second home or investment property in Australia, there are some very important steps to keep in mind. You need to be aware it’s a very different process from the first. Here’s everything you need to know.
Most grants are off the table
One of the biggest differences between home loans for your home and home loans for an investment property is that you are no longer eligible for many of the grants that might have been available to you the first time round, like first home owner grants. The lack of homebuyer’s grants means that you need to save up your own deposit before buying.
Depending on which state you live in, first home owners grants will be available with slight variations. These can shave thousands of dollars off how much you need to save up for that first deposit (for example, $10,000 in NSW). These are often limited to your first purchase whether you’re buying an existing home or building your dream home.
Adding to your real estate property requires organised financials and a clear savings strategy to build up your investment deposit.
Tap into your equity
Whilst a lack of grants can seem like a kick to the dirt, remember, if you already own a property then you have a head start. As you pay off the home loan, you build equity in it – value that is inherent to the home, but also equity also increases as the property’s value rises.
Say you bought your first home for $400,000 and over the first few years you’ve managed to pay off $20,000 of that loan. Meaning you’ve got $380,000 left to repay. Your equity would be sitting comfortably at $20,000. However, in that same period, your property’s value increased from $400,000 to $420,000. Your equity would then become $40,000.
So it’s likely that you might have a healthy amount of equity to use up as security against your second home.
Boost your income
Different investors will have different situations. You might be looking to be an owner-occupier for your second property, meaning your original property is available to leased out. If this is the case, you’re adding a new income stream, boosting your cash flow and adding significant amounts to your budget.
This is not a straight forward exercise, so speaking financial planner or a home loan expert should be your first step in this process of investing. Calculating your current and expected financial situation is crucial to success.
Structuring your home loan
Make no mistake, managing a home loan when you’re borrowing for multiple properties is a balancing act, and requires significant effort. How you go about funding your investments is a difficult decision. Do you refinance your existing mortgage to cover both properties? Do you start an entirely new investment loan for your second property? How much can you even borrow?
These questions are difficult to answer, so again, wealth management should be a keen focus of yours. That’s why we recommend seeking out financial planning advice from experienced professionals who can guide you in structuring your debt to maximise your long-term gains.
Managing multiple properties leads to complex loan structures, requiring a lot of administration, whether it be taxes, management fees or numerous expenses that come with the territory of investment properties. Financial planning will but you in the best position to avoid the nightmare scenario of being forced to sell your investment property.
Buy now, sell later?
When upgrading to a new home, one of the more common questions we hear is: should I buy first and sell my existing home later? Unfortunately there is no straight forward answer. It depends on your personal situation and the strength of the property market you’re looking at.
If you sell first, you can end up struggling to find the right property to buy in a competitive market. On the flip side, if you’re current home is in an area with a high demand for property, you might be better placed to buy when the right property is available, safe in the knowledge that you’ll be able to sell your existing property due to the demand in your post code.
If this is your situation, then you’ll want to think about ‘bridging loans’ which are special types of loans suited for this exact situation. Chat to one of our experienced home loan experts if you want to explore how these work.
While the process of purchasing a second home may appear to be simple when compared to your first time, it’s the little nuances that will make or break your plans. Speak to our experts for more information and to get started on that plan for your second home!
The new year is upon us, and with it comes opportunities to take control of your home loan by proactively looking for ways to save. If available and used correctly, an offset account is an excellent tool to lower the amount of interest you pay on your mortgage and help you pay off your loan faster.