Owning two properties is a great financial ambition and with Australian house prices on the rise, doing so has great potential to improve your financial situation in the long term. Buying a second property also requires hard work, discipline and effort. Here are some financial pointers to help with the process of buying your second property.
1. Property purchase potential
Really understanding why you want a second property before you set out will help to inform all your other decisions in the property purchasing process.
Are you planning to rent out your current home and buy something else to move into? Are you buying a ‘renovators dream’ to knock down and develop? Are you buying your first investment property? Are you selling your current home and buying another home? Each of these questions form a different finance conversation and different finance structures.
2. Your cash flow and budget
Ask yourself: can you easily service both mortgages? Do you have a stable income? What finance strategy do you have in place to accommodate for unexpected circumstances like no rental income or temporary loss of job?
Better still, keep a budget so you know what you can reasonably handle so you won’t over-extend yourself. What banks will look at is how effectively can you service both mortgages on top of your basic living expenses. Download our budget planner and have a go at completing your own personal budget – www.bluekeyfinance.com.au/home-loan-calculators/budget-planner-spreadsheet/
It is important to fully assess and understand your borrowing capacity (we can help you with this – just give us a call). Lenders will look at your overall position of assets and liabilities, your credit report, your employment history, and how strong your borrowing power based on your ‘true end position’.
When considering your cash flow and budget, it is also well worth including a ‘safety buffer’ contingency plan. This could be three to six months’ worth of repayments and living expenses, or similar, depending on your savings ability.
3. Will you be renting out one of your two properties?
It is essential you get a rental estimate for your investment property before you make your purchase. Having a rough estimate of rental income will help you with setting your budget and understanding your cash flow. We utilise powerful software called ‘Property investment analysis’ which can closely estimate your expected tax refund from renting out a property based on your marginal tax rates and proportional ownership of that rental property – call us, we’d be happy to provide you with such a detailed and comprehensive report.
4. Loan type and loan structure
Finding the right home loan product for your financing needs depends entirely on your current financial position and your short and long-term goals. This is why the right advice is imperative when taking on a higher amount of debt across two different properties. A few scenarios we can discuss include:
Using your existing equity
Equity is the difference between what your property is worth and how much you owe on it. Tapping into this equity could give you a larger deposit for your second property purchase, which could be beneficial for your borrowing capacity and your overall budget. If you’re looking at doing this, you will need to have your home revalued. In order to determine how much equity you have in your property, a lender will perform a valuation using an independent valuer before determining how much you can borrow and approving your loan.
Refinancing or staying with your current mortgage lender
Use the opportunity to consider your home loan needs in relation to your future goals and ask yourself how well your current loan is performing for you. There are some record low rates on offer at the moment and we always seem to have up to 20 special campaigns that it would be worth talking to us about what other home loan products are suitable for you and your goals.
We are here to help you with your financial goals, so please chat to us about how we can structure your loan so your second property purchase can really set you up for the future.