Interest rates being at historic lows at the moment are egging more people on to invest in property. That is why more people want to learn how to buy a second house. While current market conditions might make situations difficult for first-time home buyers, if you already own a house, you can use “leverage” to benefit you, and help you buy a second house.
Please note that lending criteria and policies are all subject to change and,/or being applied differently, and may not accurately be reflected by this article.
Ways to buy a second house
Getting a security on your current house
How can you buy a second house as an investment property? To do this, you can use your existing house as security. This will help you borrow money, and allow you to leverage to buy more investment properties. This is what is known as “freeing up equity.”
Refinancing your mortgage
To increase borrowing for your second house, you could refinance your current mortgage into a lower interest rate at a higher valuation.
Refinancing can save you thousands of dollars in interest repayments, helping you in the long run. This will allow you to be free of your debts faster through lower mortgage repayments. At the same time, refinancing will also re-value your property, increasing how much you can borrow.
Consider getting mortgage advice to help you with this. Believe us; you will not regret this move.
Understanding fees and rates
When you get a lower interest rate, this will negatively impact your current banks’ profits. That is why banks step up and offer you to break fees the moment they find out you are looking at other options. At times, they will even offer to lower their rates and give you cash backs.
When your interest rates undergo these significant drops, you end up saving money.
Although breaking fees are a scare tactic banks use on people who are off moving away from lower interest rates, you can use this to your advantage.
You see, break fees are a fixed sum a bank charges an individual who wants to move to a lower interest rate. You can pay this amount up front, which is the reasons why people get scared of refinancing.
Paying the break fees can set you back a bit. However, you can add this to your mortgage, so you pay it off more quickly. Banks might also let you borrow a little more to cover the break fees if you do not have the funds to settle this up front.
Refinancing and your equity
Refinancing and decreasing your mortgage can increase equity by 20-50%. With rising property prices, especially in Auckland, the equity in the property can increase as well. This is what is known as capital gains. In Auckland, a 60% Loan to Valuation Ratio (LVR) limit is applied on investment properties [Note: this may be changed to 75%, or is currently in the process of so]. That means that you need to be able to make a 40% [possibly 35%] equity/deposit on the purchase price of the property.
Importance of revaluation
Remember that the price you paid to buy your house is no longer its current value. This is why it is important to conduct a revaluation of your property.
You can also utilise the additional amount you can on other expenses like the interest you incur. This is known as revolving credit. Simply put, you are using the bank’s money to buy your second property.
It would be ideal to refinance while rates are low and banks are looking to lend large amounts of money. Market dips will also be conducive to investing in a second property, so keep an eye out for these.
Consider refinancing after the property value has increased, and don’t shy away from things like revolving credit and increasing your mortgage – regardless of how intimidating these might seem, they can benefit you. You could also consider hiring the services of mortgage advisers – some of which offer free consultations – and sift through available options.
This is a resource that is often undervalued or completely overlooked, and considering your options could reveal outstanding benefits.