Around a third of Australian housing finance is owned by investors. However, these mostly aren’t multi-millionaires looking to kick back and live off rental earnings for their foreseeable future, no. These are middle-aged, salary earners or SME owners hoping to make some form of capital gain and build up a good retirement fund. So, are you considering buying a second property and renting your first? Here’s what you need to consider.

Understand how equity works

Equity is the value of your current property (professionally valued) minus your remaining mortgage debt. Therefore, this equity can be used with your initial deposit when buying a second property. The term for this is known as ‘mortgage equity withdrawal’. Mortgagechoice.com.au presents a fantastic example table for working out accessible equity.

80% of Property Value	Remaining loan amount	Home equity available to access*
$500,000	$100,000	$400,000
$600,000	$300,000	$300,000
$750,000	$400,000	$350,000
$800,000	$425,000	$375,000
$900,000	$650,000	$250,000
$1,000,000	$700,000	$300,000
$1,250,000	$700,000	$550,000

So, you can use equity to buy a second home. There are a couple of ways to utilise it effectively.

1. Mortgage Refinancing: Why bother with two mortgages from different lenders? Chances are, you’l receive a much better rate if you keep things simple and refinance both your loans. This also increases the principal on your original loan!
2. Line of credit: If you open a seperate home loan that gives an amount of credit based on the equity in your exisiting property. This could be very beneficial for tax purposes.

Remember, if you plan on renting out your second home, you’ll have to receive an investment loan, which generally have higher interest rates.

For any financial decision, it’s always recommended to do your own autonomous research and seek advice from financial experts, everyone is different.

Is buying a second property a good investment?

There is never a clear answer to this. It always “could” be, or it “could” be a poor investment that will lose you money. It depends on multiple factors. The price you buy the property at, the performance of it, the financial structure of your investment and more. First things first, get advice from an accountant or financial professional before buying a second property. One of the first considerations you should make is related to your cash flow. How much do you earn each month? Can you cover your current home loan repayments comfortably? Your lender will first and foremost assess if you can make extra repayments. If it’s not “enough”, you won’t be able to access a home loan for the second property.

How should I structure my investment?

Perhaps the most critical question for your investment. And, once again, a financial advisor/accountant will point you in the right direction. However, key considerations you should start researching prior are:

1. Splitting debt between properties
2. Divide ownership of property between members
3. Equity financing

If your investment structure is less than ideal, you could end up forking out much more cash than you intended. This can be due to taxation issues, loan rate fluctuations and more.

Backup Plans

A backup plan is always a sobering process to implement, as it infers worst-case scenarios. Say you lose your job, an emergency that requires a substantial amount of funds occur, what do you do? Can you still cover the repayments on two mortgages if your financial situation changes?

These questions are extremely important to ask yourself and display the importance of a backup plan. As unohomeloans.com.au exemplifies: If you lost your job, you could have a backup plan in place such as an emergency account with six months’ worth of repayments stored in it. This will give you some leeway if your regular monthly income falters.

It’s important to consider as many factors as possible, especially with the volatile and ever-changing property market that Australia finds itself in today. If you are ready to buy a second property, you have to think about how you’ll get the funds for the purchase and what home loan products suit your circumstances. We recommend that you talk to a financial expert or accountant, and they will send you in the right direction.

PiPr is home to builders and property developers. Keep an eye out in 2022, there are a lot of big things coming very soon. See what we offer here. Or better yet, watch a demo!