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Buying a second house and renting the first in Australia can be a great financial strategy to make a profit and grow your wealth. It is also a huge step to take financially; so plenty of careful planning and considered advice on how to buy a second house is crucial, to take the leap with confidence.
Look at your Finances First
It is important to ensure you will have enough funds to not only purchase your next property but be able to keep it without putting stress on your budget. Take a look at your finances and establish whether you need a home loan for your second purchase. If so, work out whether or not you have enough equity to cover the deposit for your second home purchase. You also need to consider everything a rental property needs, such as maintenance, potential renovations, council rates, strata fees and more.
Decide what your strategy is with this new property. Perhaps you intend on buying a second home and renting out the first, or maybe you wish to buy a smaller investment property to rent out to tenants straight away. Do you want to keep this property long-term or only until it increases in value? Working out your intentions for this big financial step will make your goals clearer so that you can align your budget and strategy to what your intentions are.
Working out your Deposit
While every new home loan requires a deposit, if this is your second home purchase, you will potentially be able to use the equity from your first home to put towards your second property. Buying a second home with equity takes away that initial scramble of pulling together a huge lump sum of money, when you are already tackling your first mortgage.
In some scenarios, when you have equity from your first property, this can be used as additional security for your second home loan. So how much can you borrow? This depends on how much equity you have built up in your first home. Your serviceability will also be put into question. Can you pay your current home loan for your existing property, as well as your new loan? The value of both your properties will also be compared to how much you are wanting to borrow across both home loans, to see if it is a realistic ratio.
There is a lot that goes into understanding the opportunities in the market. In my experience, clients get more out of talking about lending strategies than lending products. We then aim to match the right product and structure in an effective way, to suit your needs.
Nestor Ramirez, Senior Mortgage Broker
Making a Rental Profit
Your second property can give you a regular rental income, which can potentially cover the costs of property upkeep and mortgage repayments, making the investment “positively geared” – meaning you are at a profit and not a loss.
If being positively geared is part of your financial strategy, then make sure you look for a property that will attract more rent to cover the costs of maintaining it and paying it off.
If you would rather focus on reducing your taxable income, you may be suited to a property that is “negatively geared” instead. This essentially means that any losses you have with your property (for example, if your rent does not cover maintenance costs or your mortgage repayments), you can claim against your taxable income and tax payable.
Either way, you should ensure that over time your property will appreciate in value in the mid to long term, to make it a good investment that builds your wealth.
Counting the Costs
Buying a second property and renting the first in Australia is not for everyone’s budget. There are more costs associated than just mortgage repayments. It is important to make sure that you have enough money left over or saved, in case your rental income does not cover the costs involved.
Be prepared financially for the following situations:
- Your repayments and maintenance costs may be bigger than your rental income. You will then need enough funds ready to fill that shortfall.
- Your rental may not always have a tenant. It is possible that tenants can leave unexpectedly, and you will need to be ready with money to cover the mortgage when there are no tenants to pay the rental income to you.
- You need to make sure you have enough funds for emergency repairs, maintenance and any necessary renovations.
- While tenants need to pay for the services they use in your property, you as the owner will still need to cover bills such as council fees, strata and water bills.
- Having landlord insurance means that you are protected against the risks of renting your property out to tenants. Landlord insurance is a worthy investment as it includes building insurance, property owner liability insurance and landlord contents insurance.
- If you have a property manager looking after your property for you, you will need to pay the associated fees.
- If your home loan is set to variable, you will need to be prepared for any rate increases that can occur over time.
- Life is full of change. You need to make sure you can cover your loan repayments if your financial situation changes suddenly.
We can Help
Buying a second house and renting the first in Australia, when done within a healthy budget and with the right strategy, can help you on your way to meeting your financial dreams. It is important to get the right advice and plan your next big step carefully. Talk to our mortgage broker to find out how to leverage your first home equity and what mortgage options are best suited to you. Contact us at 02 4018 7505 for more information or book an appointment with our Newcastle mortgage brokers today.
Disclaimer: The information provided in this fact sheet is not legal, taxation or financial planning advice. It has been prepared without considering your specific needs, objectives and personal financial situation. Before acting on this information, we recommend that you consider carefully if it is appropriate for your needs, objectives and personal financial situation. All loan products are subject to lender criteria and approval. Fees, terms and conditions apply. Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Licensing Statement: Watson Mortgages Pty Ltd Credit Representative 525053 is authorised under Australian Credit Licence 389328.