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What should you consider when financing your second home?

Date Monday, 22 June 2015 4:03 PM

Four financial considerations for anyone building a second home.

As rental costs continue to rise across Australia, buying an investment property is an attractive option for people who are seeking to capitalise on the current state of the market. Others, meanwhile, might be more interested in building a new house for more personal reasons - as a holiday home perhaps, or maybe as a means of giving their children a head start in the property game.

After cutting your teeth on your first property, you've probably gained some good experience that will hold you in good stead as you consider buying your second. While this knowledge will undoubtedly prove valuable in the coming weeks, there are number of things to take into consideration when building your second home in order to make the most of this opportunity.

Calculate cash flow

Before you go rushing off to realise your dreams of becoming Australia's next property mogul, take some time to seriously think about whether your finances can support another mortgage. A second loan is going to put  your bank accounts under considerable stress, so you want to ensure you'll be able to meet your financial obligations without making too many sacrifices.

You can use the equity of your current home as leverage to help buy your second property.

Leverage equity

Equity is how much of your existing home's mortgage you have paid off - essentially, the bit of the house that is yours, not the bank's. If you've paid off a decent chunk of your current mortgage, you're sitting on a good amount of equity that you can use as leverage to help you buy your second property. Borrowing more money against your investment property may even grant you greater tax deductions.

Understand the market

If you're buying outside the region of your current home, research the area to get an informed understanding of the market you're buying into, the returns you can expect and how things might develop in the future. Look at independent data that includes information on recent growth as well as a market forecast for the region and have a chat to a local industry professional about your options.

If you're building your second home purely as an investment property, it's particularly important to make logical decisions based on what the figures reveal.

Buying a second home is an exciting opportunity for investors.Buying a second home is an exciting opportunity for investors.

Pick the right mortgage

Buying a second home opens up some interesting mortgage options that offer substantial benefits. Taking out the right home loan might make you eligible for negative gearing, a tax incentive that allows you to deduct the borrowing and maintenance costs of your investment property from your total income, if the cost of this property outweighs the income you earn from it. Before committing to anything, make sure you speak to a professional financial advisor.