How does equity work when buying a second home
You might be able to unlock the equity in your current home and buy your second home without a cash deposit.
The equity in your property is the difference between the value of your home and how much mortgage you owe.
There are different ways you can access the equity in your property:
Equity is the difference between your property value and the amount you have owing on your home loan.
- You can generally release up to 80-90% of the value in your property in equity to buy a second property.
- You must owe less than 80% of the property value on your home loan.
- Your mortgage repayment history must be perfect.
- You’ll need to provide your last two payslips.
- You’ll need to provide your most recent group certificate.
- Low doc options are available for self-employed borrowers who can’t prove their income through traditional means.
- Your credit file should be clear of black marks.
Depending on how much equity you have, you can refinance to access this equity and cover the cost of your deposit as well as the other costs of purchasing a property.
This will allow you to borrow up to 105% of the property value.
Call us on 1300 889 743 or complete our free assessment form if you want to get an equity loan to buy a second property with no deposit.
Cashing out is when you draw cash out of your equity and use this as your deposit to apply for a second home loan to purchase a second property.
Generally, it’s best that you provide a letter from your conveyancer confirming that you’re looking for a property or a copy of the Contract of Sale you’ve found one.
Some lenders have cash out restrictions limiting the amount you can cash out from anywhere between $10,000 – $50,000.
Luckily, not every lender has cash out restrictions!
This is where you use your existing home as security for the new purchase, bringing both properties under the one mortgage.
To do this, you must be owing less than 80% of the property value of your home.
There are benefits and drawbacks to cross-securitising such as the requirement to stay within mortgage exposure limits.
Line of Credit
If you’re on a professional package and in a position to do so, you can actually refinance your current mortgage and open a Line of Credit (LoC).
A LOC works very much like a large credit card, and it’s beneficial if you need a deposit to buy an investment property.
Depending on the amount of equity you have and the strength of your financial situation, you can increase your LOC borrowing limit to fund renovation work and general improvements to the property you’re purchasing.
What if I don’t have enough equity?
There are other options available if you don’t have enough equity to buy your second property.
Do you have a strong income, found a great investment opportunity, but can’t quite scrape together the deposit because of your current home loan commitments?
Joint ownership can allow you to buy a second property with a co-borrower who has the deposit to put towards the purchase.
It’s essential to seek financial advice before considering this form ownership because there can be problems when if and when you decide to sell the home, not to mention the ongoing costs of ownership.
If you have money saved in your offset account, then you can use it to buy a second property.
Using the offset strategy is especially beneficial when you want to convert your current home into an investment property.
As you want as much debt as possible in your investment property, the interest paid on investment loan is tax deductible.
Once you take money from your offset and towards a deposit for your second home, your current home is converted to an investment loan with a larger tax deductible debt.
What about a guarantor home loan?
A guarantor loan is generally only available to first home buyers as a no deposit option.
However, some lenders may allow you to ask your parents for help if divorce, illness or other circumstances outside of your control are forcing you to sell your home and/or downsize.
What if I have some deposit to contribute?
Contributing some of your own savings to the purchase will help strengthen your character from the bank’s perspective and will give you a better chance at approval with more lenders.
Why would I want to buy a second property with no deposit?
Long-term property investment
There’s an old saying that it’s not about timing the market but time in the market.
In saying that, taking advantage of a great investment opportunity when you see it requires you to move quickly.
The market just won’t wait around for you to save the deposit you need so a no deposit option gives you the ability to leverage the equity that’s in your home.
Over the long term, you’re potentially reaping a higher capital growth return by minimising how much of your own savings you put into the purchase.
It also allows you to keep your cash flow fluid so you can invest in other properties or undertake capital improvements to the property.
Having cash on standby is usually a good investment strategy.
House flipping is common among investors with renovation experience who do their research.
The trick is to buy quickly at what you believe to be below market value and undertake minimal renovation to sell at a higher price for a return on investment.
Buying your dream home
Good properties don’t stay on the market for long, whether you’re an investor or a homebuyer.
The first property you buy isn’t typically the one you want to stay in the rest of your life.
It could be that you’re expecting children and want to upgrade to a bigger home or you’ve changed jobs and need to move to a new location.
When there’s a property that has everything you need, using a home equity loan can help you to avoid heartache.
Alternatively, it may be that you’re not in a position to move just yet, but you want to get in early, buy low, and rent out the property in the meantime.
Divorce and separation
Separating from a partner is never easy, but it’s possible to ease the transition to a new property using the equity in the existing home.
This is common for married couples with children where the mother will stay in the family home while the father will move out.
Holiday homes aren’t generally as expensive as the home you live in because they tend to be located outside of major cities.
So it may be possible to use equity to cover all of the purchasing costs.
Bear in mind property purchasing costs
What many second home buyers don’t fully take into account are the property purchase costs.
These costs can amount to anywhere between 3-5% of the property value so you should factor this in when you’re deciding on a no deposit solution.
Essentially, to purchase a second property, you actually need 7-10% of the property value to cover:
- Your minimum 5% deposit.
- Stamp duty
- Property title transfer fee.
- Registration fees.
- Conveyancing fees.
- Inspections including building/strata and pest.
- Home loan set up fees.
- Lenders Mortgage Insurance (LMI).
FAQs about buying a second home
How much equity do I need to refinance?
The rule of thumb is to have at least 20% equity in your current property to avoid Lenders Mortgage Insurance.
How to increase equity?
There are two ways equity can increase:
- If the value of your current property increases
- When you pay down your home loan
How much equity can I access?
To find out how much equity you can access to buy a second property, you can use our home equity calculator.
What if I want to sell my current home to buy a new home?
You can use the money from the sale of your current home as a deposit for your new home.
Deciding whether to sell first and buy later or vice versa can be tricky, therefore, you can make use of a bridging loan.
A bridging loan is helpful if you haven’t sold off your current home and helps to pay for two home loans.
- Repayments are interest only until your current property is sold.
- Some lenders don’t require you to make repayments on your mortgage until your current property is sold.
- There could be a risk that you’ve overestimated the sale price of your current home.
- Your current home could take a longer time to sell.
Should I use the equity in my home to buy a second property?
|You can buy your second property sooner without the need to save for a deposit.||There is no diversification of assets if you’re using the equity to buy a second home.|
|You can use the equity from your current home to buy a second property and boost your property portfolio.||If the property market is underperforming, then the value of your home goes down.|
|When you refinance to access equity, you could get a competitive interest rate and reduce your mortgage repayments.||Your repayments could be larger as you’re incurring more debt.|
|If you’ve built enough equity, then you go opt for lower LVR loans and have a stronger borrowing power.||If your new loan is higher than 80%, you need to pay LMI.|
Want to buy a second property with no deposit?
Call us on 1300 889 743 or fill in our online enquiry form to find out if you can use the equity in your home.