You may want to buy a second property for several reasons, like having a holiday home, earning investment income or as a place to live in the future. Before you jump into buying a second property, here are some things to consider.
Can you use your home equity?
Like many, you may have struggled with raising the deposit amount when you purchased your first property. However, you may be able to use the equity in your home to pay the deposit on the second property. If the loan amount is less than 80 per cent of the property value, you will not require Lenders Mortgage Insurance (LMI), which can be a significant cost saving.
One of the second home loan requirements is often that the current equity in your home and your future income are adequate to ensure timely repayment of both the mortgages. The home equity is the difference between the current market price of the property and the amount outstanding on the mortgage. To think of it another way, it’s the proportion of your home you own free and clear.
If you have only recently bought your first home, you may not have built up much equity. This is because you haven’t had long to pay off your home loan and the market won’t have changed terribly much since you made your purchase. In this scenario, you may have to use savings instead for the deposit.
How will your second mortgage affect your cash flow?
The new property may significantly impact your budget, and often this will mean working out your cash flow by taking into account your income, expenses, and other debts.
The lenders will have to be convinced that your income is adequate to repay both the loans on time. Although rent you receive may reduce your burden to an extent, you must be able to convince the lender that you will still be able to repay the loans if your property is unoccupied.
How much do you want to borrow - and what will that cost?
Generally, lenders provide between 60 per cent and 80 per cent of the property value as the loan amount. However, you may be able to borrow up to 95 per cent of the property value from the same lender while a different lender may provide up to 85 per cent of the property value as the loan amount. Again, if you borrow more than 80 per cent, you may have to pay Lenders Mortgage Insurance and this may have to be factored into your plans.
What you’ll need to apply for a second home loan
Second home loan requirements are similar to other kinds of loans. You must provide records showing the repayment history of your current home loan. Though the specific requirements may vary from one lender to another, you will likely require:
- Good credit rating
- Timely loan repayment history with no defaults
- Reliable employment and good income history
- Statements for current loans - including your home loan
- Details on existing assets and liabilities
- Identity proof.
Costs of a second home loan
As with a first home loan, when applying for a second home loan, you may incur some costs like:
- Establishment or application fee
- Valuation and legal fees, if required
- Stamp duty