The real life guide to buying a second home

Last updated: 22 May 2024 | Estimated read time: 5 Minutes

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Is now a good time? | How to buy a second home | Can I live in my investment property?

More than two million Aussies own a second property¹. Whether you're keen to expand your real estate portfolio or dreaming of a holiday home, here are some considerations around buying a second home.

There may be many motives to buy a second home, two common reasons are as an investment, or for lifestyle. The first of these involves fairly rational decisions: choosing the right location at the right price, and receiving rental income and the potential for capital growth in the future. But if you’re thinking about buying a holiday house, a city pad for work, or a one-day-we’ll-retire-here home, it’s not always about the numbers.

Is now a good time to consider buying a second home?

So how does equity work when buying a second home? Well, if you already own the home you live in, you might be able to use the equity you’ve built up to buy a second home or investment property. That means you don’t need to save up another deposit to buy your second home.

Here’s a few things to consider before you start house-hunting.

Buying a holiday home

The idea of owning your very own patch of serenity near the beach or bush might be appealing. You have the freedom of a familiar holiday spot to use whenever you like and share with family and friends.

However, if you’re planning to cover at least some of the costs of owning a holiday home with regular holiday rentals, it could be a good idea to first add up all the expenses involved.

When Sara and Jason bought a second home a few hours north of Sydney, they were sold on the opportunity to split their time there with Airbnb rentals. But even with the house booked consistently for 10 weeks a year, the costs far outweigh the income. As well as the interest on the home loan, there are all the expenses of running it as a holiday rental – from property management, cleaning and linen service right down to the shampoo and coffee pods.

However, they see their second home as a long-term investment in lifestyle, rather than an income generator for today. They can work from there, share the space with their kids and friends, and one day plan to retire there.

Investing in a family haven

If you have adult kids still living at home, or elderly parents struggling with rising rent costs, you could buy an investment property and be their landlord.

It could be a good idea to consider a location that ticks the right boxes for a broad range of future tenants – close to transport, schools and employment, for example. For more information read our real-life guide to buying an investment property.

Buying a work-based residence

Over 70,000 Australians moved to regional areas² during the pandemic. If you’re one of them and now need to work in the city again a few days a week – or if work now requires you to travel interstate regularly – it could be an option for you to buy a second home near your office.

Planning now for future retirement

You could also look into buying a second home in your dream retirement spot and rent it to a long-term tenant until you’re ready to move in.

All these second home options could be treated as an investment for tax purposes. That means you can offset any costs involved with owning the property – including your home loan interest – against your taxable income. This is called negative gearing.

However, you’ll also pay capital gains tax if you sell a property that is not your primary residence. It’s important to understand all the options available to you, so you can decide if buying a second home is the right thing to do for your individual situation.

How to buy a second home

Buying your second home is a similar process to your first. And you’ll still need a 20% deposit if you’re looking to avoid paying Lender’s Mortgage Insurance or other risk fees – but this time you may not need to save the full amount up.

Step 1: Work out your deposit

If you’re thinking of using equity to buy second home, then you’ll need to calculate how much equity you have in your home. This is its market value, minus what you still owe on your home loan.

For example, let’s say your home is now worth $1,000,000 and your mortgage balance is still $600,000, this means you have $400,000 in equity you could use towards your purchase as a deposit.

Lenders have their own credit criteria - for example at Pepper Money we can offer loans for Investment purposes up to a maximum 95% of the purchase price.

You could borrow against your home equity, or look to refinance your existing mortgage to access that cash as a deposit for a new loan.

Step 2: Arrange finance

If your second home is an investment property – whether it’s a holiday house or long-term rental – you’ll need an investment property loan. The interest rates are usually higher than an owner-occupied home loan, but your lender will also consider your property’s rental income when assessing your eligibility. Learn more about investment property loans

Step 3: Start searching for your second home

Once you have conditional approval, you can have more confidence in your house-hunting budget. Make sure you’ve budgeted for stamp duty, conveyancing and moving costs – including furnishing your second home if necessary. It could be a good idea to get advice on realistic rental yields from local real estate agents, and check with your accountant or financial adviser about any tax implications.

Can I live in my investment property?

You can live in an investment property (and so can your family), unless you buy your second home through your Self-Managed Super Fund. There are specific rules for investing in property through an SMSF, including that no one in your family lives in the home. Not even as a tenant or holiday rental.

How we can help

Buying a second home is a big financial commitment. It’s a good idea to talk with a financial adviser or broker first to discuss your goals, and make sure your plans are realistic.

If you’re ready to take the next step, our team can help. Call us on 137 377 or enquire online and we’ll be in touch.

Contributor | Vasè Marcevska, Head of Direct Sales – Mortgages and Personal Loans

Vasè has over 16 years of experience in the Banking and Finance sector, specifically within the Third Party and Consumer lending industry. Her expertise now focuses on enhancing our Customer program through a deep understanding of mortgage origination and service excellence across our Financial products.
Read more.

Sources:

¹ Australian Bureau of Statistics. Housing Occupancy and Costs: https://www.abs.gov.au/statistics/people/housing/housing-occupancy-and-costs/2019-20#data-download

² Australian Bureau of Statistics. Growth in the regions during the pandemic https://www.abs.gov.au/media-centre/media-releases/more-growth-regions-during-pandemic

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The real life guide to buying a second home