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Are holiday homes a good investment?

Are holiday homes a good investment?

Taking out a home loan to buy an everyday property is commonplace. But more Australians are turning towards the lure of being real estate investors, purchasing rental properties across the country.

One option is to buy a holiday home, but is this a good investment?

The lure of holiday homes

New findings show one in 40 people own a holiday home, according to Roy Morgan Research. However, Melburnians are leaping ahead of the national average, with one in 20 residents of the Victorian capital owning a holiday home.

“The lucky few with holiday homes are, unsurprisingly, more likely than the average Australian to have had a holiday in the past year, and they also took two more trips on average,” said Angela Smith, Roy Morgan Research Group Account Director – Consumer Products.

Being able to head away to a holiday home is certainly appealing. But are these dwellings sound investments?

Popular Australian spots

There are plenty of popular spots across the country that could make for a good investment.

According to research from Australian Property Investor, Victoria, New South Wales and South Australia are the states with some of the hottest suburbs when it comes to rental gains for three-bedroom homes.

Spotswood, Highett, Windsor and Carlton took out the top-four spots for the biggest rise in rental rates, all suburbs hailing from Victoria. Coburg North, Cheltenham and Mentone are also popular spots, while Sydney’s Randwick, Rockdale and Neutral Bay also posted strong rental gains.

But does an everyday investment equate to a holiday home purchase? That might not always be the case.

The pros and cons holiday homes

Careful planning is essential if you own a holiday home and want it to act as a steady investment.

“With the ideal holiday rental, you should aim to cover one month’s mortgage with one week of rent.  This will allow you to cover the annual mortgage in only 12 weeks which leaves only upside from further bookings, plus time to use it yourself,” said Ali Cassim, RateCity Spokesperson.

Remember, just because you’re a fan of the coast or desert, doesn’t mean every other family or couple under the sun will want to stay at your property. Preparing for uneven cash-flow is imperative, and you should also ensure you’ve got enough money set aside to cover mortgage repayments, in case demand for holiday rentals slumps.

However, there are certainly benefits to investing in a holiday home.

“Often holiday rental owners find that there is less wear and tear than long term rentals as the property is checked more often,” Cassim stated.

Most importantly, make sure you’re buying for the right reasons. If you want an investment, you need to treat it as such and effectively market your property to attract short- to medium-term tenants. And don’t forget to use a home loan calculator to work out how much you can afford to borrow.

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Learn more about home loans

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.