What you need to know about taking out a mortgage for a vacation home

What you need to know about taking out a mortgage for a vacation home

Ideally, when you buy a holiday home, you’ll want to be able to not only enjoy it yourself but also be able to earn some money from it. Until a few years ago, your holiday home could have sat vacant for most of the year while you weren’t using it if you struggled to find holiday renters. These days, however, with websites like Airbnb, Stayz and HomeAway, it’s now easier than ever for you to find holiday renters for your holiday home.

If you’re currently looking to purchase a vacation property you’ve probably been researching holiday home loans. When doing your research, you’ll need to consider if you want to have the flexibility of living there whenever you desire or you want to earn rent. Most lenders will consider your application differently based on whether you’re using the property for personal use, or renting it out.

How much can I borrow for a holiday home loan?

Vacation home loan options vary, however, lenders may lend up to 95 per cent of the property value. You may also be able to get a loan of up to 100 per cent of the property value if you use the home equity of your existing property or have a guarantor.

If you plan to use the property for investment purposes, a few lenders may require a rental income letter showing the proposed rental income for the next year. Generally, lenders consider up to 80 per cent of the rental income to determine the vacation home loan amount.

Qualifying for a home loan for a holiday house

If you’re buying the holiday home for personal-use, lenders don’t have stringent vacation home loan requirements. There is still, however, some risk for the lenders if you default on your repayments. They may see selling your vacation home during the off-season as more difficult.

If you plan to purchase the property primarily as an investment, your application for a vacation home mortgage loan may not be considered as strong because the rental income during the off-season may be uncertain. Lenders will then be concerned that you may not be able to cover the mortgage repayment.

The holiday home mortgage is also impacted due to the costs that come with property maintenance and rates. AlsoBesides, insurers don’t usually provide home insurance if your property is vacant for more than 60 days in a year.

Buying a holiday house for self-use

Holiday homes offer a range of benefits that include lifestyle value along with rental income and tax benefits. If you buy it for personal use, you have the freedom to visit whenever you want and live there as long as you wish to.

However, it won’t provide you with rental income, which means the burden of the mortgage repayments is entirely on you. This could put extra stress on your finances if you already have a mortgage on your primary residence.

Insurers also don't provide home insurance if your property is vacant for more than 60 days out of a year because the risk of break-ins is higher. Also, it’ll take longer for emergency repairs like a burst water pipe to happen when the property remains vacant for long periods.

Buying a holiday house for rental income

If you rent your vacation home to a permanent tenant, the rental income may cover the mortgage repayments. However, you will not be able to use the house as a vacation home whenever you like. Generally, the rental income you’ll earn from long term tenants is lower than the possible rent you could get from holidaymakers.

If you rent your holiday home during the peak season you can earn higher rentals, especially if it’s located in a popular destination. Vacancies during the holiday season are lower, which means you may be able to charge higher rent.

The flip side is that property management costs may increase due to having many different temporary occupants use your property. And you’ll also have to consider when you’ll use the property for your own holidays versus getting the increased income from holidaymakers.

Is a holiday home loan right for me?

A vacation home may not be the best investment for capital appreciation as several holiday destinations don’t have strong real estate markets. These holiday destinations rely heavily on tourism dollars for their economy resulting in fluctuations and therefore may have very slow growth.

Before you make a final decision, you should consider the loan repayment, maintenance expenses, the potential rental earnings, and the fun of enjoying your own holiday home. Ensure the benefits are in line with your investment goals.

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How long does Bankwest take to approve home loans?

Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.  

Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.

Can I get a NAB home loan on casual employment?

While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.

 

 

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

If I don't like my new lender after I refinance, can I go back to my previous lender?

If you wish to return to your previous lender after refinancing, you will have to go through the refinancing process again and pay a second set of discharge and upfront fees. 

Therefore, before you refinance, it’s important to weigh up the new prospective lender against your current lender in a number of areas, including fees, flexibility, customer service and interest rate.

Can I refinance if I have other products bundled with my home loan?

If your home loan was part of a package deal that included access to credit cards, transaction accounts or term deposits from the same lender, switching all of these over to a new lender can seem daunting. However, some lenders offer to manage part of this process for you as an incentive to refinance with them – contact your lender to learn more about what they offer.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

Do other comparison sites offer the same service?

Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.