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Using Equity to buy a second property [How to]

This is the most comprehensive guide on using equity to buy a second property.

In this expert-written guide, you’ll learn everything you need to know about buying a second home and renting the first, from using equity to buy a second home to what you need to pay in stamp duty.

So if you’re looking to learn how to buy a second property with no deposit, you’ll love this guide.

Let’s dive right in.

 

Why You Would Use Equity to Buy a Second Property

Like me, you might be expecting a baby in the next few months ( 👶 due in 8 weeks time!) and your house is getting too small for your growing family so you need something bigger…

growing family

You could be with a partner, thinking about the next stage of your life and wanting to buy a house together.

Or maybe you are moving interstate for work and wanting to keep your existing home as an investment property.

Whatever the reason, your first home isn’t often your forever home and you will eventually get to a point of upgrading your home.

And while you might not have the cash in deposit you have something much more powerful: equity in your home.

 

How does equity work when buying a second home

If you have owned your property for over 5 years you may have gained equity in it.

equity calculation

Calculating the equity in your home is as simple as taking the value, minus your mortgage (or using the calculator above)

(Equity is the difference between your home value and your loan amount)

You can tap into this equity to create a bigger deposit for your second property, and increase your overall budget.

Let’s go through an example of how equity works when buying a second home…

Karen bought her first home 6 years ago for $305,000 in Brisbane with a loan of $250,000.

In the time since Karen bought her home, she met Dave, has fallen pregnant and is now wanting to move into a bigger home, in a better school catchment area.

We got her first home valued today at $500,000, and Karen owes $250,000.

How does equity work when buying a second home

The awesome news is that Karen now has $250,000 equity in her first home, meaning she can withdraw up to $150,000 in home loan equity.

This $150,000 home loan equity can be used as a deposit on her second home.

Here we work through of the numbers:

1st Home Your 1st Home
Property Value

Existing Loan 

$500,000

$250,000

Maximum Lending (80%) $400,000

($500,000 x 80%)

(Your value x 80%)
Maximum new equity loan (which can be used as a deposit) $150,000

($400,000-$250,0000)

(Exiting loan – new loan)

Read More: Equity Calculator: How to Work out Your usable Equity?
 

 

How to buy a second property with no deposit

You might have an existing home and be wondering: Can I use my property to buy a second home?

buying a second home

To qualify to buy a second home with no deposit you need:

  • ✅ To have equity of 10-20% in your existing property 
  • ✅ Ideally, owe under 80% of your existing property value 
  • ✅ To have a clean repayment history
  • ✅ Be currently working, or be employed 
  • ✅ Have a clear credit file 

Let’s look at Karen’s example again.

If Karen and Dave wanted to buy a second home, and they didn’t own an existing home they would need to have a cash deposit and savings to get the new place.

family buying house

But Karen can get a loan against the $250,000 in equity available against her first home, and put an 80% loan against this to take out $150,000 in new lending.

1st Home Your 1st Home
Property Value

Existing Loan 

$500,000

$250,000

Maximum Lending (80%) $400,000

($500,000 x 80%)

(Your value x 80%)
Maximum new equity loan (which can be used as a deposit) $150,000

($400,000-$250,0000)

(Exiting loan – new loan)
Total Loans $400,000

($250,000 + $150,000)

(Existing Loan + New Loan)

This $150,000 can be used as a deposit to buy a second property!

(In other words, Karen doesn’t need any cash or savings as deposit)

Karen can use the equity in her 1st property, to purchase a 2nd home.

 

Can you buy a second house and rent the first?

If you are wanting to buy a second house, or upgrade your first home you might be wondering: can I rent the first?

The good news is, yes you can – let’s look at Karen’s situation again.

equity to buy another property

Karen has found a second home to buy for $700,000.

The plan is to keep her first home as an investment property and live in the second home.

How to buy a second property with no deposit

(So Karen wants to rent her first property, while she lives in the 2nd one)

1st Home 2nd Home
Property Value

Existing Loan 

$500,000

$250,000

$700,000

NA

Maximum Lending (80%) $400,000

($500,000 x 80%)

$560,000

($560,000 x 80%)

Maximum new equity loan (which can be used as a deposit) $150,000

($400,000-$250,0000)

Total Loans (she only wants to borrow up to $140k for deposit) $390,000

($250,000 + $140,000)

$560,000
How much needed to buy 2nd home? $140,000 + Costs

($700,000-$560,000)

How much available? $150,000
Equity left over 🎉 $10,000

This is completely fine, and in fact, the banks might use the rental income from your 1st house towards your overall income.

It can also give you access to tax strategies like Negative Gearing.

Read More: What Is Negative Gearing? Here’s a Simple Plain English Answer

 

How do you rent your old home and keep as an investment?

There could be tax benefits for renting your old home and keeping it as an investment property.

(If you are wanting tax advice, you will need to speak to your accountant)

But the steps involved in renting out your old home, and keeping it as an investment are:

If you want to speak with someone about your situation, give our Home Loan Experts a call on 1300 088 065 or complete an Online Assessment to see what your options are.

Read More: How much home can I afford?

 

Can we afford a second property?

While it might be possible to buy a second home, looking at how much debt you are about to get yourself in you might be asking: can we afford the 2nd property?

This is ultimately going to come down to your income, and cash flow but a few things to consider:

  • ✅ Calculate how much the total repayments will be, versus your total income.
  • ✅ Estimate what your rental expenses might be.
  • ✅ Try to maintain a safety buffer. 

Estelle’s new baby (and home)

Estelle is 32 weeks pregnant and has been looking for a new home for her family for the past 8 months.

She finally found the perfect home but wasn’t sure if she could qualify for a loan.

Applying for a Home Loan during Pregnancy_

Her plan was to take 5 months off after the birth of her new baby, then go back to work.

1st Home 2nd Home
Property Value $300,000 $650,000
Loans $240,000 $520,000
Repayments (per month) $900 $2,500
Other Costs $200 (agent, rates) $300 (rates, electricity)
Income (per month) now $800 (rental) $7,000 (combined salary)
Surplus (or shortfall) ($300) $4,200
Total surplus $3,900

Now let’s look at the income while Estelle is on Maternity Leave

Repayments (per month) $900 $2,500
Other Costs $200 (agent, rates) $300 (rates, electricity)
Income (per month) now $800 (rental) $3,000 (one salary)
Surplus (or shortfall) ($300) ($200)
Total shortfall (per month) ($500)

Estelle thinks she will have 5 months off work, we suggest having a bit of a buffer to make sure you have enough money put away for a bit extra.

So let’s assume 6 months off x $500 shortfall = $3,000 buffer.

(Plus you want to add in some living expenses on top)

Either way, if you have a baby try to estimate how much time you’re having off and build a safety buffer for this.

Read More: Buying a Home While Pregnant or on Maternity Leave

 

What is the best loan structure?

Cross Collateralisation is a loan structure most banks will use, it involved using your existing home as security to buy a new property putting both homes under the one mortgage.

The downside to cross-collateralisation (also known as cross-collateralization, cross-securitising, or cross collateral mortgage) is it can limit your options in the future.

cross-collateralization

Cross-collateralization can lock you in, and limit your options.

For example, if you want to sell your existing home in the future – you will need to revalue your new home at the point, and if the valuation comes in lower you might OWE the bank more money.

The upside to cross-collateralisation is that the banks will sometimes give you sharper interest rates.

There can be pros and cons to crossing your properties within your structure, either way, we’d suggest speaking with a Mortgage Broker to find out what is best for you.

To discuss your situation, contact our Mortgage Brokers on 1300 088 065 or fill in our free online enquiry form to get a callback.

 

Will the bank refinance the first loan and combine the two?

You will want to talk to the bank, or your Mortgage Broker about this before you sign any forms.

In a cross-collateralised structure, the bank will look at combining both loans and both properties.

Let’s look at the cross collateralised example from above.

cross collateralization explained

The problem with this structure is if you go to sell your first home down the line, the bank can ask you to get a new bank valuation.

A better structure would be like this.

not cross collateralization

The 1st home and 2nd home would be stand-alone secured, meaning you could sell or refinance either and not need to get new valuations. So if the market were to change you’d be protected.

 

Should I stay with my current lender or refinance?

While different rates and products, the valuation makes the largest difference.

I have seen valuations make and break buying a seance property.

can i afford a second home

For example, with this client we recently helped we managed to get them $130,000 increase in their property valuation by looking at another bank.

Assuming an 80% LVR loan, that is $104,000 in additional home loan equity they used towards buying a second home.

Valuer Amount Difference
Bank Valuation 1 $640,000
Bank Valuation 2 $640,000
Bank Valuation 3 $770,000 $130,000

Read More: How to Challenge a Bank Valuation

 

Am I required to pay mortgage insurance?

Yes you could be, depending on the valuation of your first home. If your lending is over 80% LVR you would need to pay lenders mortgage insurance.

LMI calculator

LMI calculator can work out how much the lenders mortgage insurance will cost.

Read More: How much will LMI cost?

 

How to buy a second house

Remember, every home loan situation is different.

If you are looking to buy a home our team at Hunter Galloway can help.

Guarantor Home Loan

Jayden Vecchio and Hunter Galloway are experts at Home Loans.

I’m Jayden Vecchio, and our team here at Hunter Galloway helps home buyers with navigating the home buying process.

Speak with our mortgage brokers about your options.

Call us on 1300 088 065 or complete our free assessment form today.

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