Second Home Buyers Guide
Buy your next home with confidence
While your mortgage is one of the most significant financial commitments you’re likely to make, the feeling of coming home everyday to a space you can call your own is richly satisfying and rewarding.
But as your lifestyle evolves and changes, so can your housing needs. Maybe it’s time to upsize from an apartment to a house, relocate interstate for a job or you’re ready to buy an investment property. This guide is designed to make it easier for you to take that next step on your property journey.
With Mortgage House as your guide you’ll discover how to make your next move an easy one.
Buying your next home?
There are a range of reasons for a second home loan, including:
- Your family is growing and you need more space
- You’re looking to downsize after your grown-up kids have left the nest
- Your location requirements have changed
- You want a second property to use as a holiday home
- You want to use the equity in your current home to buy an investment property
Remember the excitement of moving into your first home? Buying your second home can be even more exciting because you can do so much more. We’ll explore the full potential in this guide.
Taking stock of your current situation
Been there, done that. Now do it better
You’ve been through it all at least once already and experienced all the highs and lows while buying your first home. It gets easier – consider it a trial run. Living in your home and getting used to your neighbourhood and commute to work for a year or five years would have given you a good idea of what you like about your home and location, so you know exactly what you want when you’re ready to buy your next home
“The most difficult property to buy is your first one, the second one gets easier and the third one becomes easier again.”
~ Ken Sayer
(Founder and CEO, Mortgage House)
Start off with an advantage first home buyers don’t have
You’ve successfully completed the property-buying process at least once – that’s a huge advantage. However, an even bigger advantage is you’ll have equity to use. When you were buying your current home, you might have had to cut corners to save money for a deposit. To buy your next home, that may not be necessary.
Equity is the difference between the amount you still owe on your mortgage and the property’s current market value. Depending on how long you’ve had your mortgage and the current property market, you may have paid off a significant chunk of your loan and your home could have increased in value.
You could be sitting on an equity gold mine
As a homeowner, you are in a powerful position being able to access the equity you’ve built up in your current home. It’s important to understand the health of your mortgage to determine how it can benefit you the next time round.
Myth
The first step is looking for a house.
Fact
Browsing open homes is always fun, but before you set your heart on a property, you need to make sure to get pre-approved for a mortgage. A vital step even if you're buying your second property. This will determine what your budget is so you can narrow down your property search.
What do you want to achieve next?
You’ve decided you want to buy your next home, but what are you looking to achieve? Once you know the answer to that question, it can help guide your next move.
Renovate your current home
You might be thinking about knocking down walls for open plan living, adding a couple of bedrooms or building an outdoor area to add value to your home. Factor in all the costs first, as moving to a bigger place that fits your needs could be a better option compared to major structural home renovations.
Upsize to a second home
The need for a spacious home might even point you towards a knock-down and rebuild. That could also mean you get to live in the suburb you’ve come to love. However, you will have to rent somewhere else while your new home is being built, and you might wonder if it’s better to just buy another property instead.
Move and use your existing home as an investment property
Another popular choice with second home buyers is to use the equity in their current home as a deposit towards their next home. That way, you still get to hang on to your current home as an investment property and the rental income helps pay off the mortgage, potentially taking care of itself
Use home equity to buy an investment property
Love your home and the suburb you live in? You could use your home equity to buy an investment property to generate rental income and to cash in on future capital growth. Your current home could be the key to setting yourself up for a comfortable retirement.
Lay the groundwork with research
Before this stage is over you should know exactly what you are looking for in a new home or investment property, and have an idea of which area you would like to purchase in. You’ll have a budget and a list of requirements, like the number of bedrooms, or a large garden. If you’re investing, learn more about your desired target market to know what they’re looking for in a rental property.
It’s important to get it right and do your research before you buy. We can give you a hand with a FREE Property Report.
To ask yourself first
What do you want to achieve with your next property?
You may think this is an obvious question, but surprisingly it’s one that many people fail to think about seriously. You may be excited to discover the amount a lender is willing to lend you, but will you be able to afford the mortgage repayments while maintaining the same lifestyle you’ve been used to?
Is your budget and cash flow sufficient to cover all costs?
Will you be able to keep up with the increase in repayments if interest rates go up? Or to cover mortgage repayments on your investment property when it’s vacant? Getting your finances in order, making a budget to account for all your monthly expenses and fully understanding your income and expenses is not just a smart, money-savvy habit to cultivate – it will give you a good idea of whether you can afford your next property.
What is the state of your credit score?
Lenders will always check your credit score to decide on your creditworthiness. A good credit score could help you negotiate a lower rate. In preparation for taking on a new and potentially larger second mortgage, it’s not just important to have your savings in order, but making sure you have credit card debt under control, pay your bills on time and avoid taking more debt than you have to. Taking these measures will help maintain and improve your credit rating and should be your priority before you even get to the borrowing stage.
Should I keep my home as an investment?
A common dilemma is wondering whether to hold onto your current property and turn it into a rental investment. There are three factors to consider when deciding whether keeping your home as an investment will give you the best financial result:
Capital Gains Tax (CGT)
If you sell your home, which is defined as your official main residence, for more than what you purchased it for, you won’t need to pay tax on capital gained.
Tax Deductible Debt versus Non-Tax Deductible Debt
If you plan to change your main residence (so your new home is your main residence, and your old home becomes your investment property):
- Interest charged on your new home loan is not tax deductible
If you have paid off most of your home loan, the remaining loan amount will become investment debt. This is important to note because you’ll need to borrow the maximum amount against your new ‘main residence’. - Interest charged on your investment property loan is tax deductible
If you refinance and use the equity in your existing home to buy your next ‘main residence’ you can’t claim the interest on that portion as a tax deduction – even though it is secured against what is now an investment property.
Will your home be a good investment for others?
It’s a common mistake. Just because you’ve loved living in your home it doesn’t necessarily mean that tenants and potential future buyers will also find it an attractive option. You have to ask yourself, does your property have what it takes to make it a good investment or rental for someone else?
Tip: Keep your emotions out of the equation. Weigh up all the options and think like an investor would to help get the best financial outcome.
Case study
Jane bought her home 15 years ago for 350,000. Her property is now worth $900,000 and she still owes $100,000 on her mortgage. Jane decides it’s time to upsize and wants to hang on to her property as an investment because it seems like an easy strategy. Jane finds a new property she wants to purchase for $1,000,000.00.
Here are two possible scenarios:
Jane borrows $800,000, which is 80% LVR (loan to value ratio) using $200,000 equity from her now investment property, to avoid paying the Lenders Mortgage Insurance premium.
So even though there is now $100,000 (original debt) + $200,000 (debt for new home) = $300,000 debt secured against the now investment property, only the original debt of $100,000 is tax deductible.
Jane will have a debt of $800,000 where the interest is not tax deductible.
SUMMARY
- Property value (old main residence): $900,000
- Owing: $100,000 (tax deductible)
- New home (new main residence): $1,000,000 (not tax deductible)
- Borrow: $800,000
- Security against investment property (old home): $200,000 (not tax deductible)
If Jane sells her current home for $900,000, she will be left with $800,000 (after paying off the $100,000 owed on her mortgage). This $800,000 would be exempt of capital gains tax and be available to put towards her new home purchase.
She would only have a non-tax deductible mortgage of $200,00 ($1,000,000 new home purchase price – $800,000 cash).
Jane will be left with $800,000 of equity she could use to direct towards suitable investments.
SUMMARY
- Sell first home: $900,000 (only $100,000 owing)
- Funds available, no CGT: $800,000
- Mortgage for new home: $200,000 ($1,000,000 – $800,000) – not-tax deductible
- Equity available to leverage for investment: $800,000
After looking at the two scenarios you will realise that more often than not, selling your family home to buy your next could most likely give you the best financial result.
Disclaimer: This is only an example to illustrate two possible scenarios and does not take into account interest rates, or any selling and buying costs into consideration.
You may have equity in your current home,
but what can you do with it?
Firstly, understand what equity is. As mentioned earlier, equity is the difference between the amount you owe on your property versus what it is now worth. For example, if your home is valued at $800,000 and you still owe $500,000 on your mortgage, you have $300,000 in equity. Renovations or increase in the location’s value can all be factors in your property now being worth more.
Refinancing is a common way to access your equity. Refinancing is where you move your loan to a lender who is able to give you a better interest rate that lowers your repayments. By doing so, you gain access to your equity, and reap the benefits of a better deal!
Here are some of the ways you could use equity:
Use equity as a deposit for your second home
Not everyone has ready cash sitting in a bank account for a deposit. Instead, you can unlock your home equity and use it as a deposit on your next home. Your equity could lower your Loan to Value Ratio (LVR) to below 80% saving you the extra cost of Lenders Mortgage Insurance (LMI) premium.
Refinance to negotiate a lower rate and better loan terms
Everyone wants lower rates and better loan terms, but refinancing isn’t the only option. If you have a good amount of equity that gives you a bigger deposit for a second home, you’re in a better position to negotiate a lower rate, loan term and features on your next loan.
Act as a guarantor for your kid's home loan
Getting into the property market can be tough for the younger generation. If you’re fortunate enough to have paid off your home or have substantial equity, you can act as a guarantor and help your kids buy their first home.
With our Family Pledge loan option, you can offer your property as security on their home loan, so they don’t have to save a deposit. CLICK HERE to find out how our Family Pledge Loan works.
Close smaller debts and add it to your home loan
Your equity also comes in useful for consolidating smaller debts like high-interest credit debt or a personal loan into your home loan. You will be able to enjoy the same low rate as your home loan and just single monthly repaymets to manage. CLICK HERE to read our Guide to Debt Consolidation.
Build wealth for a comfortable retirement
Your exisiting home can be your springboard to a financially secure future. Using your home equity for investment purposes offers many options to choose from, but make sure you do plenty of research to ensure success.
- Shares: The stock market can be your best friend when prices are rising and your worst enemy when they’re falling. If you invest wisely in the right stock, you can make a lot of money through capital gains and dividends payouts.
- Vacant block of land: Investing in land can bring success in multiple ways. Investing in vacant land can also be a good way to spread the costs of building a house – buying the plot before prices go up or lots disappear, and then saving again for the house build.
- Residential property: Investing in property has twofold potential. Either you can use your second property to rent out to tenants, giving you an extra regular income, or you can renovate in order to sell at a higher price – achieving a quick turnaround and lump sum of profit.
- Dual occupancy and granny flats: Dual occupancy investments offers two separate living spaces, meaning two tenancy opportunities and two rental incomes. These can be under the guise of a house with individual room/s rented out (dual-occupancy), a duplex, or a granny flat.
It’s important to educate yourself when it comes to investing in property. CLICK HERE to read our Guide to Investing in Real Estate. If you need assistance, speak to one of our Lending Specialists to determine the best home loan options to suit your requirements.
Property is still a winner when it comes to investing
Whether your goal is to retire early and travel or to be debt-free in 10 years, investing in quality real estate can help you achieve that ultimate goal of creating long-term wealth.
Generates a regular income
If you rent out your investment property, your tenant’s payments can often completely cover the cost of the mortgage, and more.
Reduces your tax liability
You can claim back many costs associated with maintaining a rental property, including Property Manager’s fees, council rates, repairs and maintenance costs, plus the interest on your loan.
Capital gains
Over time you may have paid off a substaintital amount of your mortgage if not all of it. Combined with the rise in property prices you could see the biggest financial gains when you sell your investment .
Ever wondered why the rich get richer and the poor stay the same?
The rich invest their savings in assets that appreciate in value over time, like shares and property, which gives them compunding returns and grows their wealth. The poor can take longer to save money but can often spend their savings on assets that depreciate in value like cars and everyday luxuries.
Factor in these additional costs
There are additional costs related to buying a home – you’ll know that from buying your current home. So what costs do you need to budget for your next purchase?
Stamp Duty
Stamp Duty (sometimes known as the Transfer of Land Duty) is a substantial cost that is unavoidable for a second home buyer. The tax set is to cover changing the title and ownership details of the property, and can set you back tens of thousands of dollars. You must pay your Stamp Duty within three months of the sale or transfer taking place.
Bridging loan
Balancing mortgages while buying a new home and trying to sell your current one can be tricky. That’s when a bridging Loans comes in handy. This shorter-term loan helps bridge the gap between selling your current property and buying the next one. With the option to make interest-only repayments until your current home sells, it offers you flexibility and peace of mind
Real estate agent fees for selling your property
Real Estate fees cover the costs of advertising involved in helping to sell your home as well as the commission payable to the agent. These costs will vary with each agent, so it’s good to be aware of their fees before you commit to selling your home with them.
Lenders’ Mortgage Insurance
Lenders’ Mortgage Insurance (or LMI) can help hopeful buyers with less than a 20% deposit buy a home sooner. This insures the lender in the case of the borrower defaulting. The cost of LMI will vary depending on your lender, but is fairly dependent on the level of risk involved. While buying your second home, the equity in your current home may help you avoid this LMI premium.
Registration Fees/Legal Fees
You will also require the services of a conveyancer for your next home purchase as well so bear in mind this cost as well as registration fees and lender application fees if any required.
Building Inspection
When you’re buying a property, you want to ensure it is not going to cause you any unwanted surprises later on. A Building Inspection will check for any structural problems (including things like asbestos or rising damp) and a Pest Inspection will ensure the house is free of pests and termites/termite damage.
The professionals who can help you on your way
Buying property can be overwhelming, even when it’s your second home. The good news is there are plenty of professionals whose job it is to help you get through it with ease. The experts that will guide you through the process successfully include:
Lending Specialist
There can be big differences between buying your first home and your second. From Bridging Loans to property investment loans, there’s a lot you might not be familiar with. Our award-winning Lending Specialists can identify which home loan is best for your specific needs, both now and in the long run.
Real Estate Agent or Buyer’s Agent
A Real Estate or Buyer’s Agent should have excellent knowledge of the housing market, the area you want to buy in, and of your requirements to help find your ideal home. Their objective mindset eliminates emotion from the process, so you’re more likely to find your dream second home.
Conveyancer
A reputable Conveyancer will sort complicated legal paperwork for you, translating any legal jargon so you know exactly what’s being asked of you. Using a conveyancer will make the process as stress-free as possible, and you’ll sleep easy knowing the legal legwork is covered.
Building Inspector
It’s strongly recommended to hire a Building Inspector to give the green light on a property’s structural stability, and also confirming no indication of things like asbestos or pests. This can save you thousands in the long run and will guarantee no nasty surprises post-purchase.
A Mentor
It’s always beneficial to speak with other experienced property buyers or investors. By sharing stories and asking questions, a trusted mentor may shed light on a situation you have not yet been through, and can provide invaluable knowledge and insight to the process.
Yourself
You’ve done this before, so you know the process, and this time round you’ll be prepared for things that surprised you as a first time buyer. But don’t be fooled – there is always more to learn, especially in the ever-changing property market. It’s crucial to arm yourself with all the basic knowledge you may need – this guide and our free online tools and resources will get you started.
Choose the home loan type that works best for you
At the end of the day, the decision will entirely depend on your financial goals and needs.
An interest-only loan means you only pay back the interest, instead of both interest and principal. You can also choose between variable, fixed, or split rates. Lower repayments are common to these loans, temporarily freeing up cash flow so you can set up your new home, or pay off moving costs, instead.
Can’t decide between a fixed interest rate or variable? The Toggle Offset loan splits your loan in half, allowing you to ‘toggle’ between fixed and variable to save the most interest. Use variable rates when the interest rate drops, and swap to fixed when interest rates rise – total flexibility.
With loan portability, you can “move” your home loan from one property to another, saving both money and time. Mortgage portability can be incredibly useful as all BSB and bank account details remain the same, so there’ll be no re-arrangement interruptions. You also won’t succumb to refinancing or establishment fees, which can save you thousands.
A split home loan is similar to a Toggle Offset loan from before, but instead you can choose the percentage of loan that has a fixed rate, and a percentage that is variable. This can be changed a number of times for free depending on your loan conditions.
If you’re a business owner, contractor, or freelancer, it can be hard to prove your income or employment history that’s required to take out a mortgage. Though your income may be irregular, it can still be high and stable enough to make mortgage payments. This is where a Low Documentation or Low Doc loan, can help and can be applied to many of the loans we offer.
A construction loan can be great for those building their dream home from scratch. You’ll have the option of paying interest-only before construction begins. We’ll pay funds in stages as construction milestones are met, and you will only pay interest on what has been paid out, which can save you thousands. You must have council-approved plans and a fixed tender price prior to applying for this loan.
Myth
You don’t need a Lending Specialist
Fact
You might think that just because you’ve done it before, you can buy your next home solo with help from the internet. That’s where you could be wrong. Seeking the help of one of our Lending Specialists will ensure you find the right loan, tailored to your needs.
Get a conditional approval
before you start house-hunting
At Mortgage House, we’re here to help you get into your dream home sooner. To make that dream a reality, you need to know exactly how much you can afford to borrow. Our conditional approval will tell you what you need to know, so you can start the exciting process of house-hunting with a clear mind.
Apply online or talk to a Lending Specialist
Don’t waste time looking at properties that may be out of your budget – apply online or book your free quote to get your free conditional approval!
Know exactly how much you can afford to borrow
The great thing about conditional approval is that a lender will be able to give you a clear picture of what your home loan situation looks like: What you can afford, what your budget should be and more.
Save time and only look at properties within your budget
You won’t waste time looking at properties outside your price range. Once you have a budget to work with, you can zero in on the properties you can actually afford and find the one that’s right for you.
Close smaller debts and add it your home loan
Your equity also comes in useful for consolidating all your smaller debts, like the high-interest credit balance or a personal loan, into your home loan. You will benefit from the same low home loan rate and only single monthly repayments to manage.
Fast track your way into your next home
Get started and APPLY ONLINE within miutes.
- Less paper work & waiting time
- Complete the form in 15 minutes
- Save & come back later
Home Loan Application Checklist
Preparing documentation for your home loan
From your previous experience you will know that taking on a mortgage is an involved process. Lenders need to verify your identity and financial standing. It’s a good idea to get your finances in order at least six months before you apply for a home loan to demonstrate that you will be able to honour the loan repayments throughout the life of the loan.
- Photo identification
- Tax Returns for the previous two years
- Payslips for the previous three months
- Bank statements for the previous six months
Why Mortgage House?
We are a leading Australian non-bank lender
Mortgage House is one of Australia’s most awarded Lenders. We’ve been in business since 1986 and we’ll be only too happy to share our industry experience with you. We provide a number of unique mortgage solutions that the banks can’t match. Our super-low interest rates and extensive range of loan options means there’s a loan suited to every person. With one-on-one support, our expert Lending Specialists will help find you the best loan option for your needs.
What do you want to achieve with your next property?
- We don’t have to maintain an expensive nationwide branch network. Less overheads for us means competitive super-low rates for you.
- We’re 100% digital and our Apply Online process is streamlined for prompt processing so you won’t drown in a sea of paperwork.
- Unlike mortgage brokers, we’re big enough to offer you our own products. Unlike banks, we’re small enough to care about your needs.
