So you’re looking to buy a second property but don’t have enough cash saved up for a deposit?
Luckily there are ways you can still get that dream vacation home or investment opportunity without scraping the bottom of the piggy bank or borrowing from friends.
Let’s take a closer look at how to buy a second property with no deposit.
How to Buy a Second Property With No Deposit?
One of the most common ways to buy a second home without putting down a deposit is to use the existing equity in your property.
What Is Equity?
Home equity is the difference between the current value of the property and the outstanding mortgage on it.
For instance, if the value of the property is $500,000 and you owe $300,000 to your mortgage lender, then you have $200,000 of equity in your property.
You can build equity by regularly paying the principal and interest payments on your mortgage. Equity is also built over time as the value of your home increases. So a property you bought at $500,000 5 years ago can now be worth $600,000 or more, given the current housing market.
$500,000 (property value) – $300,000 (your mortgage debt) = $200,000 (equity)
How Much Can I Borrow for My Second Property?
Usable equity is the amount you can access and borrow against from the bank. Lenders will not give you a loan against the full value of your home since they don’t want to be stuck with debt that is higher than the value of the property.
Borrowers typically access up to 80% of the property’s value since any loans above that sum mean you need to pay Lender’s Mortgage Insurance (LMI).
Using the same example above, your usable equity is $100k. It is the total amount you can borrow, or 80% of the property’s value ($400,000 in this case), minus your existing mortgage ($300,000).
How Much Will the New Property Cost?
Once you’ve calculated how much usable equity you have, you can get a rough estimation of the purchase price of the second property.
$500,000 (property value)$400,000 (property value at 80%) – $300,000 (your mortgage) = $100,000 (usable equity)
NAB recommends using the rule of four, i.e. multiplying your usable equity by four.
In this case, it means you can start looking at properties priced at $400,000 that would require an $80,000 deposit. That said, this is just a rough estimate and not an actual guarantee as how much mortgage you get approved for depends on age, income, credit score and other factors.
How Does Equity Work When Buying a Second Home?
Now that you know how much you can borrow, it is time to see how you can access the equity you have in your property.
Looking to improve your chances of getting approved for a mortgage?Here are some tips and tricks.
Refinance your mortgage
Refinancing involves replacing your existing mortgage with a new one and taking the extra cash to use as a deposit for a second home. You basically take out a second mortgage which is the debt secured against your property. You can use your existing lender or go to a new mortgage provider who might offer better rates.
Keep in mind that you need to owe less than 80% of the property value on your mortgage.
Depending on how much equity you have, you could borrow enough to cover the deposit on the second property and the related costs of purchasing a house, such as legal fees and stamp duty (among others).
Line of credit
A line of credit works much like a credit card and allows you to use as much of your equity as you need, provided you stay under the credit limit.
What’s more, with a line of credit you only pay interest on the amount you use. For example, if you have $100,000 in usable equity and you only need $80,000 for the deposit on a second property, you would only pay interest on the $80,000 you spend.
Although flexible, a line of credit home loan can be risky. For one, it means you need to manage another loan in addition to the mortgage on your owner-occupied property. Interest rates on this type of loan are also higher, so you would pay more in the long run compared to a traditional home loan.
Cross-collaterisation
This involves using your existing home as security for the purchase of a second property bringing the two properties under one mortgage. Cross-collaterisation is a risky move since a drop in value in either of the properties will impact the value of the entire portfolio.
It would be best if you discussed this option with an experienced mortgage broker before proceeding.
Partial deposit
If the equity in your home is not enough for a deposit on a second property, you could add some of your savings to cover the gap.
Other Ways You Can Buy a Second Home With No Deposit
Joint ownership
You could apply for joint ownership with someone who has the means to make a deposit. A down payment will still be required but since you won’t put up any funds, you will in effect purchase the second property without a deposit. Joint ownership also increases your chances of getting approved for a home loan, however, it can cause a lot of issues, especially if you decide to sell the property down the line.
Guarantor loan
Alternatively, you could try a guarantor loan whereby someone else is liable to repay your loan if you default on the mortgage. Lenders, though, typically accept guarantors for first buyers who do not have the finances for a deposit.
Offset Account
If you have been putting money aside in an offset account attached to your mortgage, you might have accumulated enough to pay the deposit on a second property. You will need to take out another loan to cover the rest of the costs, though.
Redraw facility
Another option is to use the redraw facility on your mortgage (if you have one). This allows you to make additional repayments to your loan, money which you can then redraw and use as a deposit for a second home. Bear in mind that not all lenders will allow you to redraw, plus there are limitations to how much extra you can repay, which means the money you access through a redraw facility may not be enough to cover the deposit.
Gifted deposit
Finally, you could get the money for a deposit as a gift from a friend or a family member.
Related reading:What happens to a redraw facility when your mortgage is paid off?
What Are the Risks Involved in Releasing Equity to Purchase Another Property?
One of the biggest risks is that by refinancing your mortgage you would in effect be paying off two home loans, so you need to ensure that you can afford monthly repayments.
Another potential downside is that all your equity will be tied up in property when you could diversify it across other asset classes and invest in shares and stocks.
Finally, although refinancing a home loan usually involves switching to another mortgage with more favourable terms, a home equity loan could be very expensive, particularly if you are buying a bigger property.
Is Releasing Equity to Purchase a Second Property Worth It?
It depends on your situation. If you come across an investment opportunity that is hard to miss or have seen a vacation home you fell in love with, using the equity in your existing home to purchase a new one may be worth it.
That said, you should always discuss your options with a financial advisor who will inform you of the best course of action based on your income, age, and financial circumstances.
1. Can I afford a second property?
Before applying for a loan on a second property, you need to take a good look at your finances. If you have enough equity to cover the deposit, legal fees, stamp duty tax and other costs that come with buying a property, you could be able to refinance your existing mortgage and purchase a new property. Be aware that lenders look at more than how much deposit you can muster, including your income, credit score and overall affordability,
2. How much do you need for a second house deposit?
Although each lender has their own terms and conditions, in general, you would need to deposit at least 20% of the property’s value. Some mortgage providers might accept a 5% or 10% deposit, although in this case, you would be required to pay Lenders Mortgage Insurance.
3. Is buying a second house and renting the first possible in Australia?
If you are renting out a home you need to consider the possible risks involved, such as bill payments and maintenance costs. You should also be aware that you might not have rental income coming in all the time, so make sure you have a safety net in case you are not able to make monthly mortgage repayments.
4. How to buy an investment property with no deposit?
If you find a low-priced investment property that you can’t afford to miss out on, but have not saved enough cash for a deposit, you could release the existing equity in your home as a down payment. You can access your equity either as a line of credit or by refinancing your home loan.
