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Buying a second home

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What you need to know about buying a second home

Are you considering if it’s a good idea to buy a second house and rent the first? Here’s what you need to know about your second home loan.

Buying a second house is super exciting (hello property mogul!). But if it’s been a while since you bought your first home and you’re not sure what to expect, here’s the main differences to be across when snapping up your second.

How do I purchase a second home? And how much deposit is needed when buying a second home?

The process of buying a second property is similar to when you bought your first one. For a first home buyer, having a 20% deposit saves you from paying Lenders Mortgage Insurance (LMI) which could cost you thousands.

But when it comes to buying a second home to live in, you might be able to rely on the equity you have built up in your first home. So, if you’ve already been saving for a second home loan deposit, that cash could go towards a fresh reno or new furniture. Nice!

How does equity work when buying a second home?

Equity is the value of your current property (you’ll need to get it valued) minus your remaining mortgage debt.

Essentially, the equity from your first property can be used as a deposit towards the purchase of a second property. The official term for this is mortgage equity withdrawal.

A couple of ways to do this could be to:

  • Refinance your mortgage – You might have wondered; can a person have two mortgages? The short answer is yes, and they can be with different lenders. But if you’d prefer to keep things simple, you could refinance to combine both mortgages into one account by increasing the principal on your original loan.
     
  • Take out a line of credit – This is a separate home loan that gives you an amount of credit based on the equity in your existing property. It could be a tax-effective option but there could also be drawbacks, like higher mortgage repayments and interest rates.

Whether you can access the equity in your home by borrowing additional funds will depend on a number of factors, like your income and living expenses. LMI might apply depending on the amount you want to borrow and the property’s value. Like any financial decision, it’s always best to do your research, seek advice from a finance expert and consider your circumstances.

Do I need an owner occupier or investment loan?

If you plan on renting out your second home, you’ll need an investment loan, which could have a higher interest rate. Investment loans might have some tax benefits, but managing a property comes with its own set of expenses, like agents and maintenance. If you’re unsure about whether you’re ready for the financial commitment of a second property, check out this helpful guide.

Is there anything else I need to think about?

Building your property portfolio is a massive achievement (well done you!), but there’s lots of factors to weigh up. Even though you might be able to dip into your equity, you’re still taking on more debt. Revisiting your daily expenses and household income could help you decide if buying a second home is the right move.

 


The information contained in this article is of a general nature only. It doesn’t take account of any person’s objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate for your circumstances and seek independent legal, financial, and taxation advice.