Thinking about buying a second home? Make sure you know the facts and risks involved before heading to the mortgage lenders.
Some say buying your second home is more stressful than the first. It’s not all about you anymore, now you need to think of the kids, the car and the in-laws.
So, if you’re thinking about buying, today is the time to strike. The property market is recovering and home buyers now have a rare investment opportunity to secure second property at prices of those well under 2007.
Does having another property help you in getting a home loan?
The simple answer is yes. This is because property is typically is an asset that's worth a lot, the greater the value of your assets, the more you chance you have of getting a second loan. But be careful– there have been cases where people who’ve applied for home equity loans have spent their money on luxury things like boats and cars, leaving no way to pay it back.
However, using your property to finance a loan is a great way of expanding your portfolio – for serious investors who are disciplined in their approach. For others, it might be a good chance to help a family member buy their dream home.
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Using the equity in your home to get another mortgage
How much you can borrow depends on your financial situation. Your bank will look at the value of your primary residence, your debt history, your income and any other assets you have when deciding on the value of a loan.
If you do have an existing loan, you must refinance it as part of the equity loan application. This means that the lender will look at every single detail of your finances: from your car, to the belongings in your house.
It's usually cheaper to borrow up to 80% of the value of your current property. This is so because if you borrow more than 80% LVR, you will incur a lender’s mortgage insurance premium which could cost tens of thousands of dollars.
Determining which loan structure is best suited for you
The line of credit loan (LOC)
Your lender will set you up with a line of credit (LOC), which is a flexible loan that allows you to use your cheque account, withdraw money and repay as you choose.
You are given two options: make repayments on a monthly basis or don’t make a payment as long as you remain below the agreed spending limit set by the lender. However, borrowers who cannot afford to make additional repayments would be in trouble if they were to refinance to an LOC – this is because it offers a higher interest rate which could surpass any savings made by combining your accounts.
Lenders that offer line of credit loans
The 100% offset home loan
A 100% offset home loan can offer you the same advantages of an LOC, but with interest rates that are comparatively lower.
Instead of earning interest on your offset account, you save interest on your home loan. The benefits of this is that the savings account is much lower than what the bank charges you on your home loan.
Dual income families with high monthly expenses tend to benefit the most from this type of loan, as they need the funds for their regular spending. For example, if you had a home loan of $500,000 and you had an offset account with $100,000 then the bank would only charge you interest as if you owed them $400,000.
How to support a second mortgage
There are several things to consider when taking your second mortgage. The most important one is to ensure you make your loan suit your circumstances.
If you’re buying for investment reasons, it is essential to obtain a rental estimate letter from the real estate agent currently handling the property that you wish to buy.
Lenders only consider around 50-75% of your rental income. To ensure that your property doesn’t become an issue, choose a property that is well located and is able to support a constant flow of income.
It’s worth mentioning that if you are planning to use your existing property as security to fund the deposit for the second one, you are putting yourself at risk at losing both because your using your first home to guarantee the mortgage on your second home.
Beware of the traps
Always have a strong contingency plan and a comfortable financial back-up plan for when circumstances suddenly change.
"It's vital that those taking out a second home loan take family planning into account for the future, because this is how a lot of people get into trouble. Not everyone plans to have another child but it happens and this adds a lot of financial stress to the process," explains Philip Minett, branch manager at Wizard, Sydney CBD.
If you have noticed that you’ve consolidated debt more than once in your life, then the problem is your spending habits, not the loans. Once you have completed a debt consolidation do not apply for more, or you’ll end up in a cycle of spending and consolidating – which will result in you losing your equity.
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