Having a second home in Australia is a dream; think of it as a place for the holidays, or somewhere you can relax or retire. The reality is that there are many complexities that come with financing and buying a second home for yourself.
Professional Lending Solutions is a trusted mortgage broker and one-stop shop for all your home financing needs. We specialise in helping Australians achieve their dreams of buying a second home for themselves.
In this blog we’ll talk about how to finance your second home.
Why Buy A Second Home in Australia?
There are many reasons why people are interested in buying a second property in Australia. They include the following:
Holiday Second Home
A second holiday home can be your haven when you’re escaping the city and enjoy the different landscapes. It’ll give you the freedom of having a familiar holiday spot that you can use whenever you like and also have with your family and other loved ones.
If you are interested in using it for regular holiday rentals, sum up all the expenses involved.
Investment Property
You can make this property into an investment property so that you can generate rental income and build wealth. Thus, it is crucial to look for an investment property that you can currently afford and has a location with a high tenant appeal.
If you are interested in buying a second house as a rental property, then you need to understand the costs and steps involved when applying for one. You also need to understand the rental returns you can receive; this is called the rental yield. You can get it by evaluating the difference between your rental income and all associated expenses.
Retirement Home
You can also use your second residential property as a dream retirement spot or even rent it to a long-term tenant until you’re ready to move into it.
These options for second houses can be considered investments for tax purposes. As a result, it is possible to use negative gearing to offset costs that come with property ownership, even your home loan interest against your taxable income.
If you sell your second property, you will need to also pay for capital gains tax.
Financing Options For Buying A Second Home
Standard Variable Rate Mortgages
An SVR, also known as a standard variable rate mortgage, pertains to the interest rate charge after an initial deal period on a fixed or tracker rate mortgage ends. This means mortgage payment amounts fluctuate.
- Flexibility: This option features redraw (access extra repayments) and offset accounts (reduce interest by linking savings).
- Potential for lower rates: If interest rates fall, your repayments will be less in amount.
- No break fees: There is no penalty for early full payment or switching lenders.
- Uncertainty of rates: Your repayments can increase if interest rates will rise.
- Risk for mortgage stress: The raising of rates can help strain finances.
Fixed-rate Mortgages
In a fixed rate mortgage, the interest rate is locked for a period. This usually ranges from 1-5 years and has consistent repayments.
- Certainty of payments: It will be easier to budget. The repayment amounts will not change during the fixed term.
- Protection from rate rises: During the fixed period, you will be protected from interest rate increases.
- Break fees: If you pay off the loan early or switch lenders during the fixed terms, penalties are applicable.
- Less flexibility: This option may not have limited extra repayment options or redraw facilities.
- Miss out on rate falls: You won’t benefit if the interest rates have dropped. You will only start benefiting until the fixed term ends.
Investment property loans
These mortgages are specifically designed to purchase a property to generate rental income.
- Potential tax benefits: Other expenses and interest repayments can be deducted from tax.
- Opportunity for capital growth: The value of your property can increase over time.
- Rental income: This gives a regular income stream.
- Higher interest rates: These interest rates might be higher compared to the usual rates.
- Stricter lending criteria: These have a higher risk. As a result, lenders have stricter requirements.
- Vacancy risk: There are potential periods without rental income.
This deposit is usually larger and can be at least 20% with some lenders. This is so that you can avoid paying lenders mortgage insurance (LMI).
You may also want to take note of the following:
- Stamp duty: Getting a second property can result in significant stamp duty costs. These vary by state.
- Ongoing costs: There are also other costs that come with financing your second property. These include maintenance, insurance and property management.
- Current market risks: The values of a property can increase or decrease. The income you may get from rent may not always be sufficient for expenses.
Get Your Second Home With Us
It is possible to buy your second residential property with us, especially if you have the right financial planning and if you work with a trusted mortgage broker to navigate the complexities of financing it.
Professional Lending Solutions offers personalised services and can help you find most suitable loan options and secure competitive rates. Get started on your second home journey today!
Phil’s journey from banking to mortgage brokering reflects a career driven by a commitment to personalised service and tailored financial solutions. With a distinguished background in banking, including roles at NAB, ANZ and Lloyds TSB Bank in the UK, Phil spent 12 years developing expertise in personal and commercial finance, while also completing a Bachelor of Business (Finance), followed by an MBA majoring in International Business.