Thinking of buying a second property and renting out the first? Buying a second property offers the opportunity to build wealth through long-term capital growth. It’s a great way to get started in property investing as you can use your existing home as an investment while leveraging it to buy your next property, without having to sell.
Buying your second property is very similar to buying your first home but there are more complexities involved. To help you get your head around it all, we’ve put together a guide to buying your second property and how second-time buyers might go about financing the purchase.
Do you need a deposit for your second property?
In short: yes, you need a deposit to purchase your second property — but it doesn’t always have to be a cash deposit.
When you bought your first home, you would’ve made an initial contribution to the property purchase price (unless you used a guarantor loan). Ideally, this would be 20% of the property price. So far, all this still applies to your second property purchase.
However, you don’t need a cash deposit to buy your second property, whether you’re buying an investment property or upgrading your home. If you've already got one property under your belt, it's likely you have some equity in that property which you can put towards part or all of your deposit. This is done by refinancing your existing home loan for an equity release. In a way, it may seem like buying a property with no deposit but it’s more accurate to think of it as transferring your equity from your existing property to cover the deposit for your new property.
But refinancing isn’t for everyone. For example, if you’re on a fixed rate loan, you’ll have to pay a break cost to your current lender to refinance your home loan, even if you’re not buying an investment. And refinancing to access your equity isn’t an option for people who owe more than 80% of their property’s value.
If you plan to rent out your first home after you buy your second, Futurerent is another option. You could use Futurerent to help you buy your second property sooner before property values go up by accessing your rent in advance from your first property, even if you’re not buying an investment property. Getting your rent in advance could help fund the deposit for your next property purchase or any upfront costs such as stamp duty or lenders mortgage insurance (LMI).
How much deposit do you need to buy a second property?
The deposit requirements around buying your second property would be the same as when you bought your first home. That means you'll need to pay a deposit of at least 20% of the property value. If you choose to put down a smaller deposit, you will need to pay LMI in most cases.
For instance, let’s say you want to upgrade to a $1 million house. Your deposit will need to be at least $200,000 if you don’t want to pay LMI.
There are more costs associated with buying a second property than just the deposit, such as stamp duty, refinancing costs and legal fees. Make sure to factor all the possible costs that may arise before you make a decision on the purchase.
However, depending on how much equity you have, you may be able to access enough equity to cover not just your deposit but also any other upfront costs. This means you may not have to pay anything upfront for your next property purchase if you have enough equity built up.
How much equity do you need to buy a second property?
If you’re going down the equity release route, it’s important to know that you can rarely access all of your equity to buy a second property. Lenders will typically want to see you keep a loan-to-value ratio (LVR) of at least 80% in your existing home. This means if you’re considering equity loans, you’ll generally need an LVR of at least 70% before you can access any meaningful equity for your next purchase.
Consider this example to understand how equity works when buying property:
- If your current home is worth $800,000 and your loan amount is $400,000, your usable equity would be $240,000.
- Using the above example, if you were looking to buy a $1 million house, you’d need a $200,000 deposit to avoid LMI.
- If you were to release all of your usable equity, you would have $40,000 left over to pay for any upfront costs, such as stamp duty.
An equity calculator could be a good place to start when trying to work out the amount of equity in your home. You might also want to speak with a mortgage broker for professional advice.
If you use Futurerent to buy your second property, the amount of equity you have in your current home is irrelevant as you’re accessing your rent in advance, as opposed to releasing your equity. This means it doesn’t matter if you’ve owned your home for one year or five years, what matters more is your home’s rental income potential.
How much will a bank lend for a second property?
As a rule of thumb when buying property, a bank will generally lend up to 80% of the property’s value.
However, what the bank will actually lend you for your new investment loan will come down to your borrowing capacity. Your borrowing power and loan approval will largely depend on two major factors factors:
- equity — the amount of equity you have in your first home
- serviceability — your ability to pay off your current home loan and new home loan, based on your income and expenses
Using the same example, if you buy a $1 million house as your second property, the bank could lend you up to $800,000. In this case, you’ll need a deposit of $200,000 (excluding other upfront costs).
Some lenders do offer low-deposit home loan options where you may be able to borrow up to 95% of the property value. This may allow you to buy your second property sooner. But on the flip side, these low-deposit home loans often come with higher interest rates, which will increase your monthly mortgage repayments. Plus, you’ll need to pay LMI if you borrow more than 80%.
How long after you buy a property can you buy another one?
There are no hard and fast rules around when you can buy your second property. The best time to venture into property investing is going to be different for everyone. Here are some of the biggest factors from a financial perspective.
Your amount of usable equity
It may be a good time for you to plan your next property purchase if you’ve built up a considerable amount of equity in your first home. The two main ways to grow your equity is capital growth from a rising property market or by making extra repayments on your home loan. However, it’s unlikely you’ll be able to access all of your equity so check how much of it is actually usable to help fund your deposit.
Your savings
You might choose to use your savings as your property deposit. Or even if you’re using your home equity, what you can access might not always be enough to fund your deposit as well as your upfront costs, so you may need some savings to supplement your equity. Try to maintain a strong buffer in your savings account to cover any unexpected costs of the purchase.
Your ability to pay off two mortgages at the same time
Buying a second property isn’t just about the deposit, it’s a long-term financial commitment so it’s critical to make sure you can afford the ongoing repayments of both mortgages, property management fees plus any potential maintenance costs. It’s a good idea to run the numbers on both properties before making any decisions.
First home buyer incentives used
If you took advantage of any government schemes for first home buyers, there are rules around how long you must live in the property, depending on which state’s incentive you used. Have a good look at the requirements of any government schemes you used before renting out your current home.
Broadly speaking, it doesn’t matter how long ago you bought your first home. If you have the financial means to buy your second property and the bank is happy with what they see, you could potentially do so even if you just bought your first home.
Can you afford two mortgages at once?
Paying off two separate mortgages is no easy feat but if you’re planning to rent out your existing home, the rental income could help make it more achievable. Whether you can afford two separate mortgages at once will depend on multiple factors.
Your home loan repayments
The first thing you should consider is whether or not you can afford another mortgage payment on top of your current payments. The repayment amounts for both your current and second property will directly affect your monthly cash flow. A repayment calculator is a good place to start when trying to understand your potential mortgage repayments. As a rule of thumb, the bigger deposit you put down, the lower your mortgage repayments could be. You can also shop around and compare home loans with lower interest rates. But keep in mind the home loan with the lowest interest rate or comparison rate isn’t necessarily the best one for you. You’ll need to factor in other home loan features, such as offset accounts.
Your potential rental income
Higher rental returns can reduce pressure on your cash flow. While you might not know the exact amount your existing home could be rented for at this stage, doing some research on the local rental market can help you form an idea of your potential rental returns. If you’ve got your eye on a specific property, you can also ask the real estate agent to provide a free rental income appraisal letter for properties they have listed.
The gearing of your portfolio
Reviewing your repayments alongside your potential rental income will help you gauge whether you might be positively or negatively geared. This might also depend on your investment strategy, as some investors choose to pursue one or the other. If you’ll be positively geared, there’s a higher chance that you’ll be able to comfortably afford both mortgages. If you’ll be negatively geared, you may need to assess whether you can afford the out-of-pocket costs.
Your financial situation
Look at your current income, savings and any other debts apart from mortgages, such as personal loans. The repayments of any other loans will need to be considered on top of your mortgages. Additionally, while you may not need to use your savings for your deposit, there’s a chance you may need it for upfront purchase costs, such as stamp duty. Plus, your financial buffer will help if unexpected costs come up.
Aside from mortgage-related costs, you will also need to consider other ongoing costs related to your investment property. This might include potential strata levies, council rates, utility bills as well as repair and maintenance expenses — all of which could add up over time. You may also need to pay capital gains tax if you decide to sell your investment property one day. It’s best to speak with a professional tax accountant before renting out your current home.
How hard is it to buy a second property?
Buying a second property may seem like a challenge, but it is absolutely possible if you have crunched the numbers, done your research beyond this home buyer guide and made sure you can finance the purchase.
While it’s exciting to think about buying your second property and renting out your first to generate additional income, investing in property shouldn’t be a spur-of-the-moment decision. There are costs and risks involved in taking out multiple property loans — you should consider these as a property investor when buying property.
