There are numerous reasons for buying a second property – you may want a rental property for extra income, or holiday home that you can let for part of the year.
Whatever your reason for considering a second property, most banks offer a wide range of home loan solutions for second home buyers. Of course, the one you choose will depend on your circumstances and what you can afford.
To avoid costly setbacks, carry out proper research. It’s essential to ensure you know what you are letting yourself in for.
When buying a second property, the bank will carry out a new credit and affordability assessment that meets the National Credit Act (NCA) requirements. As with your existing loan, the assessment is done on your current credit record, household budget and your ability to afford the minimum monthly repayments.
There are two common scenarios for second home buyers:
- You still have an outstanding balance on your current bond and require a further loan.
- Your bond is paid up, and you are applying for a new home loan.
Understandably, the bank may consider that repaying two loans could increase the likelihood of you not keeping up with your financial commitments. Because of the increased risk to the bank, you may be offered a loan at a higher rate of interest than with your existing home loan.
You will need to convince the bank that you will be able to afford the monthly repayments over the loan term. To do this, you need to work out a detailed budget factoring in expected income and expenses.
Take into account the following:
- Insurance on the property
- Municipal rates and taxes
- Property maintenance and repairs
- Managing agents’ fees – the standard fee is 8% to 10% of the monthly rent for managing a property.
Rental income - It would be unrealistic to assume your property will be fully-let all year round. This means you need to be able to cover the monthly bond repayments when the property is vacant or if the tenants fail to pay rent.
The market dictates what rent you can charge, so to calculate the rent for your property; you need to look at rentals of similar properties in the area. If your monthly bond repayment amount is more than the rent you can charge, you will have to fund the difference from your budget, along with the other costs of owning a property.
Paying off your existing bond may not be a good idea from a tax perspective, as you would probably not be allowed to claim your interest deductions against the rental income.
A better option could be to use some of the equity in your primary residence to get the best possible interest rate on your investment property by putting down a large deposit.
This deposit would also mean the monthly repayments on your investment property would be lower, and the repayments on your existing home loan would remain the same. In the event of a lack of rental income, this could mean the difference between financial comfort and disaster.
Whether you plan to buy a second property to generate passive income or want more space for your growing family, it is always advisable to seek expert advice before choosing a financing solution that best suits your needs.