Buying a second home - whether you’re going to live in it or rent it out - is a major step up the property ladder. There are many things to think about, because buying a second home likely means that you’ll be responsible for another mortgage. So if you’re thinking of buying a second home, here are some things to consider:
Purpose of getting a second home
Being clear about your purpose can help you choose your property. Will you use it as a holiday home or are you buying it to turn it to an investment property? Your purpose will influence your decision on the location, amenities, number of rooms, and much more.
The cost of two homes
Obviously with two homes, your expenses will start to increase. You’ll have added financial responsibilities for repairs and maintenance, extra mortgage repayments, stamp duty and utility bills if you’re planning on living in your second home. Be reasonable with your budget and see if you can handle the cost of owning two homes, on top of your cost of living.
You can use our borrowing power calculator to assess how much you can afford to spend on your second home. This figure will be based on your income, debts, assets and liabilities - just like your first loan. On the other hand, if you’re buying for the purpose of turning it into a rental property, you will need to consider your cash flows so you know how much you’ll be earning from your investment.
Financing your second home
You’ll most likely need a mortgage to finance your second home. One way you can do this is by using the equity in your home to buy a second property. Equity is the difference between the value of your home and how much you owe against it. For example, if your home is valued at $550,000 and you owe $250,000, you have equity of $300,000.
In this case, your equity is used as a deposit for your second home, and your first home becomes security for the new debt. You will need to have your current home revalued to determine your home equity. This is because the home's value may have risen because of capital growth, or maybe because of home renovations.
These are just some of the things to think about when buying a second home. Since this is a major step up the property ladder, take time to do your research and understand the benefits and risks that come with it.