Buying your second property can be a huge financial step. Like any investment, purchasing a second property comes with risks, but with proper research it can take you a step closer to being more financially independent. On the other hand, perhaps you’re considering purchasing a second property for your children or parents. Either way, in a property market that’s experiencing large fluctuations, it’s important that you do your research, understand the risks and choose a property that’s right for you.
Get comfortable with your cash flow
Already having a mortgage on your first home, you will likely know the importance of being confident with managing your money. When you add a second mortgage for a new property, your cash flow will be significantly impacted yet again. You must be sure that your income is stable and healthy enough to service both mortgages and support your costs of living. This is what you should be calculating as it’s what your lenders will want to be sure of.
Know where to look for potential properties
Understanding the property market in the early stages of your research can make it easier to manage your finances and expectations as you seek out a loan and look to make a purchase. There’s a range of things to consider when finding a house, especially if it’s for investment. Not only do you need to consider the affordability of a house, but you should keep its growth capabilities in mind.
Look for area’s where property is cheap but set for growth. This along with a range of sought after facilities like schools, shopping centers and public transport will help assure you constantly have tenants.
The internet has not only made it easy to do property research, but it’s also made property investment considerably more accessible. Sites like Roofstock have online property investment marketplaces where properties can be researched and bought all online. Maybe you prefer visiting the properties you buy, but at the very least, sites like Roofstock can provide you with valuable information on local markets.
Build up a financial safety buffer
A second mortgage can be quite demanding on your income. Even if you think you can comfortably afford the repayments, life is full of challenges and there may be unexpected expenses. With two mortgages, it’s easier to find yourself struggling to make repayments. Therefore, it’s important to save up a “safety barrier”, or cash that you can use to pay repayments in times of emergency.
Similarly, it’s important to consider you and your families future. Having another child, going on an overseas trip, or needing a new vehicle are all things that cost significant amounts of money and could make it hard to make the repayments on a second home loan. Considering this, and building up a financial safety barrier is especially important if you’re using your existing owner-occupied property to draw equity from.
Tap into Your First Homes Equity
A strategy many investors take is to draw equity from their first home in order to increase their borrowing capacity. This is fairly common but it’s important to understand the risks and how it will affect you.
The equity of an asset, or your home, is its value, minus any money owed on it. So, you must have paid of a decent part of your first mortgage in order to build up enough equity to make this possible. The lender may also look to revalue your home to ensure they understand how much equity it is that you have, so be sure your home is well maintained.
It’s important to remember that while doing this you can increase your purchase budget and borrowing capacity, you also put your assets at more risk, especially in the case of a property market collapse.
Deposits and Borrowing Capacity
How much deposit you will need will depend on how much the lender is prepared to lend and what type of loan you take out. Before you make an offer on a property, it’s crucial that you understand how much your deposit will be while also factoring in costs like Stamp Duty, Conveyancing or legal fees, building inspections and insurance.
Often your borrowing capacity won’t be 100% of the property value. This is why you must pay a deposit. In other words, the lower your borrowing capacity is, or the less your lender wants to give you, the higher your deposit will be.
If you want to maximize your borrowing capacity, consider paying all your current debts, such as credit cards or tuition. You can also consider approaching a different lender or employing a skilled mortgage broker who may be able to increase your borrowing capacity.
Buying a second home is largely no different than buying a first, however it will be more financially demanding and without proper preparation you may be at greater risk of defaulting. Before purchasing a second property, you should be sure your finances are in order, you’re confident in the market and you understand the costs involved.
