Investment Property

Buying a second property: equity, finance and home loans

Nathan Gooley
Aug 27, 2021
Yard Financial Pty Ltd | ACN 623 357 513 | Australian Credit Licence 509481

Table of Contents

Looking to buy a second property?

You could already own an existing home and be looking to make a subsequent investment in property, or you could be just starting out on your property investment journey and want to understand how you can build a multi property portfolio. 

Our article will help you understand how to access equity in your existing property, how you can finance your second home purchase and what criteria you need to meet to qualify for a second home loan. 

Let’s start by looking at the most common reasons for buying another property. 

Why buy a second property?

There are a number of reasons why you may be considering buying a second property. 

Owning a second property is as a way of:

  • Upgrading your current home.
  • Investing in property as an asset class, with the objective of long term capital growth.
  • Owning a secondary residence or holiday home.
  • Investing in a property for a family member, like your children.
  • Securing a home for your retirement.

Like any other property investment you need to consider how you are going to finance your purchase. 

How do I buy a second property?

Buying a second, additional property as an existing homeowner is different to being a first time buyer though you still have to make sure your finances are in order. 

The major difference is that if you own a home you could use the equity in it to finance the second property. Lenders allow you to borrow against the equity in your home or refinance your existing loan to borrow more money. You could also save money in an offset account and use that as a deposit. 

But you need to make sure you have enough equity and understand how much you could end up paying in interest by borrowing against it.

How much deposit do I need to buy a second home?

The process of buying a second home is similar to your first purchase, so you will have to have a deposit to secure a home loan from a lender.

They require at least a 10% deposit, though to avoid paying Lenders Mortgage Insurance (LMI) you should ideally try to save a 20% deposit. If you have enough equity in your current home you may be able to use it as a deposit.

Let’s now take a more detailed look at equity and how it can help you secure a home loan. 

What is equity and how can it help me buy a second home?

Home equity is the difference between the current market value of your property and the remaining amount you owe on your home loan. 

It will help you lower the upfront cash commitment that can come with purchasing an additional property. You can use any equity you have as the deposit for your new property. If you've had your home loan for some time you are likely to have built up a reasonable amount of home equity through your regular mortgage repayments. 

To work out how much equity you have in your home simply:

Calculate the current market value of your home - Your current home loan balance = Your home equity.

This would be the total equity you have built up in your home, but a lender won’t typically let you access all of this equity.

How do lenders calculate your home equity?

You’ll only be able to access a portion or percentage of your total equity. Lenders calculate this to help lower the risk of you accessing your equity and then defaulting on your loan. A lender may allow you to access more if you are willing to pay lenders mortgage insurance (LMI).

The equity you have access to is calculated by:

Work out 80% of the current market value of your property - Your current home loan balance = Equity lenders will let you access without paying LMI.

Example: Your property is worth $500,000 and your remaining home loan is $350,000. Your lender will take your property’s value ($500,000), work out 80% of this value ($400,000) and subtract the remaining balance of your home loan ($350,000). This calculation will offer a usable equity amount of $50,000.

Now let’s take a closer look at your financing options.

Ways to finance your second home purchase

As we have touched on there are a number of ways you can finance a second mortgage, each with its own pros and cons.

Home equity release or line of credit

If you have a significant amount of equity in your existing home you can apply for a home equity release or line of credit based on this. This is a tax-effective option as you only pay the interest portion of the loan that’s drawn, but it could also involve higher overall mortgage repayments and interest rates.

You can generally access 80% - 90% of the equity value of your existing property in equity to buy a second property.

Refinancing

Refinancing involves obtaining a new loan, either by moving your home loan to a new lender or by updating the terms with your existing lender. This enables you to combine both mortgages - for your existing property and the new one - into a single home loan.

Offset savings

If you have an offset account and have been regularly depositing money into it, you could use this amount as a deposit toward your new property purchase.

You also may want to buy a new property to live in and sell your existing home.

Buying a new home and selling the old one

Buying a new home and selling your existing home can be tricky, as you have to get the timing right. 

This is when a bridging loan - otherwise known as bridging finance - can give you the flexibility you need. It provides finance to cover the gap - typically 6 months - between receiving funds from the sale of your existing home and buying your new property. A bridging loan can also provide finance to build a new home while you live in your current home.

Now we have covered some of the practicalities of buying a second home, you need to work out if you can actually afford it.

Can you afford a second property?

You will need to do some careful budgeting to make sure you can cover all the new costs you will be liable for. 

Your cash flow will need to cover the new mortgage payments, which are likely to be larger than when you just owned a single property. If you have purchased an investment property you will need to calculate if the rental income covers all the expenses associated with managing the property and servicing your new mortgage. If it doesn’t you could still benefit from negative gearing, by claiming the costs of managing your investment property as a tax deduction. 

You also need to understand the tax implications of owning - and selling - a second home. Under Australian Tax Office (ATO) rules you are only liable to pay capital gains tax (CGT) on a property that is not your primary residence. However, any profit you make from the sale of an investment property is part of your annual income tax assessment, and is added to your taxable income in the year you sold the property.

You can also make use of the handy tools on our site to: 

Estimate your home loan borrowing capacity, and the value of the home you can afford.

Estimate your potential loan repayments on a new home loan

Estimate your savings if you switch to a Yard home loan.

You should also read our guide to property investment and investor loans for more insights on becoming a property investor. 

Applying for a home loan with Yard

Wondering why you should consider us for your next home loan? Here is why we think we stand out:

  • Our application process is hassle-free, online and free
  • You get a dedicated loan consultant who works with you from start of application through to settlement
  • We can provide a pre-approval that’s valid for 90 days, which gives you confidence to go to bid at an auction

Other features of our online home loans include unlimited additional repayments and free redraws as well as an optional 100% offset facility. You can also check what our current rates are for investors, including any specials we have running.

Armed with this knowledge you are now in a better position to take the next step in your property investment journey.

Have any questions about our loans? We’re here to help, and our friendly local team are available to chat at a time that suits your schedule.

Want to learn more?