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It might seem like a risky decision, however buying that second piece of real estate could be one of the best decisions you make this year. Phillip Minett, branch manager at Wizard, Sydney CBD, says that while buying an investment property is usually the main reason for taking out a second mortgage, making some sacrifices to help support your family has also become a major reason.
Those borrowers from Chinese, Indian and Italian cultures all have very close families, and their communities tend to get together and help each other," Minett explains. In a rocky global financial atmosphere, however, care must be taken every step of the way to ensure that you get a property to suit your circumstances.
Cash flow A second mortgage is going to have a significant impact on your monthly cash flow, so make sure you're in a position to service both of them by having a stable income. From the lender's point of view, the key to minimising risk as a borrower lies in your ability to earn enough income to service your first and second mortgages successfully on top of the cost of living. This not only ensures you're ready to take on a second mortgage, but it also satisfies your lender's requirements for approving the additional finances.
Rental income estimate If you're buying a second home for investment purposes, it's essential to get your hands on a rental estimate letter from the real estate agent currently handling the property. To ensure that loan serviceability doesn't become an issue, it's imperative you choose a property that's well located and continues to generate a constant income to support itself.
Safety buffer If you are planning to use your existing owner-occupied property as security to fund the deposit for the second one, you are putting yourself at risk of losing both if you find you can't meet the repayments. This is why it's essential to have a strong contingency plan. Depending on your ability to save, a safety buffer could come in the form of three to six months' worth of repayments and living expenses. If you're planning a family, you have to have a comfortable financial back-up plan for when your dual income is temporarily whittled down to one wage.
Not everyone plans to have another child but it happens, and this adds a lot of financial stress to the process," explains Minett. However, those who have a mortgage for investment reasons are not covered by the same code and Lee warns that, if the loan structure for your second purchase is not set up correctly, you may unwittingly cancel your UCCC rights.
According to Lee, this usually happens automatically if you're using a protected asset — such as the home you are occupying — as security for the investment property. Lee says that the best way to ensure your second home loan is structured correctly is to speak to the lender directly, whether you have used a mortgage broker to arrange your home loan or not.
Lenders have a legal obligation to tell you that your rights may be forfeited if you use a particular structure for your second home loan. Loan type Variable interest rates are on the downward trend and fixed interest rates were quick to follow.
Patrick Clarkson of Australian Mortgage Option says that homeowners with equity and a limited cash flow may want to take advantage of low fixed rates to minimise the risks during the first few years of their second home loan.
Then you can work out how much your mortgage is going to cost you against how much rent you receive on the property and your risk is minimised in the current market," explains Clarkson. Borrowers opting for fixed rates, however, need to be aware that there is a hefty break cost if you pay off your mortgage or refinance before the fixed term ends.
As always, choosing the loan type depends on your goals and financial situation. If you are in a position to make extra repayments and want to access the money later, a good option would be a variable rate offering these features. Reassessing your borrowing capacity Like any other home loan application, your second mortgage is assessed on your overall position in relation to your income versus expenses, and assets versus liabilities.
Your lender will factor in both your deposit and your possible rental income if applicable to determine what loan to value ratio LVR they are comfortable with for you. You have to have that good combination of equity and income," Minett goes on.
Because of the pullback in the market, lenders and lenders mortgage insurance LMI companies have taken more losses, so the underwriting criteria, too, have become a lot stricter. Lenders have become very concerned about non-disclosure of liabilities, such as borrowers who try to hide credit cards and personal loans," Minett adds.
He advises borrowers to ensure that their repayments are always up to date and on time. How can you maximise your borrowing capacity? If your lender has approved your second home loan for less than you expected, and you want to stretch it out further, the first question you must ask yourself is whether you can actually afford it. Your lender will have set your borrowing capacity at a safe limit that it feels prevents you defaulting if rates were to rise any higher.
Lenders usually allow for a contingency of 1. Lee points out that the first thing you are actually doing when you increase your borrowing capacity is reducing your protection if your financial circumstances were to change.
However, if you're determined to do that, there are steps you might like to consider. First, make an effort to pay off your credit cards and cancel them, and also get rid of any other debts.
Then, to boost your chances further, think about applying to a different lender. Be aware, though, that applying to multiple lenders has a negative impact on your credit record as lenders can use your credit record to see how many times you make applications.
This could then lead to your application being rejected. A good way to avoid this is to seek help from an experienced mortgage broker who knows which lenders are likely to be more flexible with their borrowing capacities. Tapping into your equity If you've lived in your home for between five and 10 years, you have probably gained considerable equity in it. Tapping into this equity and producing a larger deposit for your second property can help increase your borrowing capacity and your overall purchase budget.
If you're looking to do this, you should be prepared for when your lender comes to revalue your property. Minett says that the best way to get the most out of its valuation is to keep it well maintained and make some cosmetic changes to improve the aesthetics of the place. You need to keep the gardens neat and tidy, and the quality of the building high," Minett explains. Staying with your current lender versus refinancing Making any changes to your financial position — such as buying a second property thus getting another home loan — offers the perfect opportunity to give your existing mortgage a health check.
So, before searching the property market, take some time to reconsider your home loan needs in relation to your future goals and ask yourself how well your current one is performing for you. Your first move, then, should be to see your accountant or financial advisor. These experts can analyse your cash flow and work with you to establish the right approach to your debt as a mortgagor with two home loans. To further the process, you can also seek the advice of a borrower's agent. Borrower's agents have emerged in the mortgage marketplace as a service to provide consumers with objective information about home loan products and how best to structure their mortgage or mortgages.
A borrower's agent should be a consumer advocate, whose advice is intended to educate you about the wide variety of home loan products in the mortgage market so that you are better informed when making your final home-loan selection. As they're not mortgage brokers or lenders, however, they should not attempt to sell you any home loan products and, if they do, they're not a true consumer advocate. So this would be the signal that you would need to seek alternative assistance.
Next, your mortgage broker suggests specific mortgage products from a variety of lenders and helps you organise your home loan application free of charge. Their payment comes from upfront and ongoing commissions paid by the lender you choose.
Minett says that it's a great idea to contact an experienced mortgage broker before deciding on any mortgage product. By this time in your life, you have more financial factors influencing it, and your serviceability may have dropped.
A lot of the time, if you approach your current lender looking for a more suitable home loan product with a better interest rate, they will probably offer a competitive solution to avoid losing you to another lender.
However, if you're keen to explore the marketplace to find a better solution for both your original home loan and a second one, you should be prepared for the high costs of refinancing. Exit costs Refinancing costs come at two different levels. The next fees are called 'deferred establishment fees' DEF and, depending on the lender and the original home loan contract, the DEF varies considerably in price.
And, if you paid no upfront fees to establish the loan, it might be higher. This is why it's essential that you read your home loan contract thoroughly before signing. Some smaller bank and non-bank lenders might approach their DEFs differently. Others could charge a percentage of the original loan cost. This cost is similar to the amount you would expect when refinancing out of a fixed rate product within the first three or four years.
Upfront costs After you've dealt with the exit charges, you come to the establishment costs to set up your new mortgage. This amount should include your application fee, document preparation, valuation costs and the bank's legal fees. If you've got huge refinancing charges but you're determined to change lenders and mortgage products, make sure you can recoup your exit costs within 12 months.
This should be your golden rule when refinancing. If your refinancing costs are similar to your savings, refinancing with a new lender might be the option for you. Quite often, you can find other home loan products just as appropriate to your situation, with interest rates that are often 0.
Home loan options for second-time buyers Finding the right home loan product for your financing needs depends entirely on your current financial position and your short- and long-term goals. This is why the right advice is imperative when taking on a higher amount of debt across two different properties. That said, there are a few mortgage products that are worth discussing for those who are thinking about getting a second mortgage.
For example, Lee says that borrowers with one or more mortgages might like to consider a packaged banking solution. They can be great for owner-occupiers who have borrowed a large sum of money for their second home loan and want the flexibility of multiple features.
How they work A pro pack is an overarching product that offers a range of discounts while you continue to pay an ongoing monthly or annual fee. This annual charge covers a range of other banking fees that you might encounter throughout the life of your mortgage, and it also waives fees charged to use features such as your credit card or redraw facility.
Although the annual fee might seem like a large chunk of money, the potential savings from the reduced interest rate can help offset it. Savings vary for borrowers, depending on the size of their loan and the discount they receive with their pro pack.
This is not the type of product you jump into before considering your other options, Minett says. The large range of features offered on a pro pack provides a lot of flexibility for borrowers who have multiple properties and who like the freedom to vary their home loan.
Generally speaking, a pro pack includes: How much could this save you? Pro packs can generally save you around 0. The range of the discounts depends on the lender and the size of the loan — the bigger the loan, the larger the discount. This example takes into account only the saving on the loan, just using the interest rates. It does not factor in the savings you might receive on transaction fees, credit cards, financial advice, life insurance, income protection, home insurance and any insurance you may have on other investment properties.
Basic and standard variable products The other home loan product that Minett says could benefit second homebuyers is a standard or basic variable rate product. If you are just starting out as a firsttime investor or you have bought a second owner-occupied home for a family member to live in, you might not need the flexibility of a professional package.
In this situation, as an alternative you could consider taking out a standard variable home loan, or even a more discounted basic variable product. If you're an owner-occupier who is buying a second home for investment purposes, a simple standard variable rate home loan with worthwhile features such as additional repayment and redraw facilities can provide the flexibility you require, without charging an annual fee being charged.
Investors receive tax benefits from the interest payable on their investment property mortgages. So, in order to keep their cash flow strong, it can be beneficial for them to make repayments of interestonly IO and leave the principal at the original borrowed amount.
There's no need for investors to pay down any of their principal until required, usually at the end of their five to year term, when the repayment schedule switches back to principal and interest. Most standard variable rate products allow borrowers to make unlimited additional repayments free, and to use a redraw facility to access the additional repayments, if required, at any time.