How to buy a house: Second home loans and equity access in Sydney, Melbourne

You might have done it all before, but buying a home the second time around might be a lot harder than you think.

buy a second home

The rules have changed, here’s what you need to learn when buying your next home.

Taryn Eaves bought her first apartment when she was just 18, and the Sydneysider has since built a portfolio, purchasing four properties with her partner in the past decade.

She’s used her knowledge of the market to grow her investments, and learned a lot about how to save and access the right loans for them during this time.

While her first property was ‘cheap’ by today’s Sydney standards ($190,000 for a two bedroom flat in the city’s outer west in 2009), Ms Eaves and her partner used their growing equity to continue to purchase homes.

“We put extra money into a redraw while saving for a deposit. It worked well, as the interest we were paying on that portion of our loan was reduced, but also pushed us to be disciplined in our savings.”

She said over the years the couple had used various ‘tricks’ to give themselves advantages, such as tapping into an interest only loan on a property they once lived in, but are now using as an investment.

“Using an interest-only loan helped us service the extra mortgage - our tenants covered the cost of this, and we weren’t out of pocket more than we could afford.”

She advises anyone looking to purchase their second or subsequent property to do their homework.

“Tap into the equity of your current home. If you do your research, you might be surprised just how much you can access, and what that allows you to upgrade to.”

She also advises people looking to purchase their next property to really look closely at the structure of their loan.

“It’s a good chance to look closely at the interest rate, and work out what features of a loan you really need. Some loan features will work better for some people than others.”

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Despite their confidence in purchasing, Ms Eaves admits there can always be challenges with purchasing a home, and she “wasn’t prepared for” the hurdles that were placed in front of the couple when purchasing their most recent property.

The couple had planned to purchase a property from Ms Eaves’s in-laws, using the equity in the homes they already owned, to extend a loan to a new home.

But the combination of the fall in Sydney’s house prices, along with more stringent borrowing capacity regulations left the couple scrambling to find ways to finalise the purchase.

“We had sorted all our valuations out (of the property they were living in) in October. But we wanted to renovate our old place before putting it up for rent. So we didn’t want to finalise the sale until January. In that time, our old place lost $60,000 in value.”

While they understood and expected market fluctuations, Ms Eaves said she was surprised by changes in her borrowing capacity, with the banks looking more closely at their daily living expenses.

“The banks increased our minimum cost of living by $6000, so that was an extra $6000 a year we had to find in income if we wanted to borrow the amount we initially thought we could have.”

“At one point we were $8 in the negative for a year — $8 was the difference between getting the loan or not. It was crazy.”

But she worked closely with her lender who advised them ways to go ahead - including finding other sources of income.

“I reached out to payroll and got them to give me an itemised list of all my incentives. My partner itemised his overtime … it was a bit of a logistical nightmare but we got it done.”

Ms Eaves says her first, and subsequent purchases had been “seamless” until now.

“Even our stamp duty was factored into the equity we had — we didn’t have to come up with extra cash to purchase our next home.”

But the sudden change in the market was a shock, and it’s something she believes others in her situation won’t be prepared for.

“You definitely have to be prepared for a downturn — property prices are pretty fluid. Even if you do get your house and you’re living in it, it might not be worth what you bought it for. You have to bear in mind that you might need to stay in that property for a long time, and you can’t really rely on that as an asset until that value goes back up —  if it does.”

Ms Eaves and her partner aren’t the only buyers feeling the shock of changes to lending laws, in combination with the drop in the market.

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Dave Easterbrook, the co-founder of Elite Buyer Agents in Melbourne, says many second or subsequent buyers are feeling the changes acutely — but they need to put these changes into context.

“The market (in Melbourne) isn’t that bad. We’ve gone up 100 per cent in seven years. We’ve come back 5.5 per cent — some properties have gone down 10 per cent. If you’re holding things long term you’ll experience the ups and downs.”

He says the nature of property fluctuations means it is important that buyers of second or subsequent homes really think about what they need and make the purchase that will suit them best in the long run.

“Get your priorities right. Realistically it’s about location and demographics. If you think about location first, that’s what you can’t change,” he says.

“People are changing what they want. They might be downgrading (from initial expectations).”

But he said buying the right home is possible “if you get your priorities right”.

After a lot of stress, Ms Eaves and her partner have just settled on the purchase of their new home and they’re now faced with the realities of moving.

“You really have to factor in the cost of moving outside of the cost of the property purchase. There are agents fees, stamp duty and the cost of movers. And it’s time consuming — you don’t want to be doing it regularly.

“We used every single one of our council clean ups to reduce the amount of stuff we need to move into our new home. It’s stressful. But luckily we have some amazing friends that have helped out!”

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Seven things to remember when purchasing your second or subsequent home

1. Can you use your loan to your advantage while you save for your next home? Adding extra money into a redraw account can encourage you to save while reducing the interest on your current loan.
2. If you are keeping your ‘old’ property as an investment, consider switching it to an interest only loan. This might help you service the mortgage.
3. The market fluctuates. Don’t try and play a short game to make money. Think about your purchase as a long-term plan. Will this new home suit you in 10 years? Will this location suit you? Do you need access to schools or good transport? You’re not trying to just break into the market this time around; think more strategically.
4. Make the most of this opportunity to get the right loan structure for you - you could save yourself a lot of money in the long term.
5. Stamp duty costs need to be factored into the overall cost of the home. You might have been exempt in your first home — you most likely won’t be now.
6. Think about the costs associated with the move: agents fees, movers fees. This can add thousands to the cost of your move, make sure you budget for this in your loan.
7. Be organised when it comes to moving day. Culling unused items is a good way to reduce the cost of movers. You also might find your old furniture won’t fit in your new home. Think about that before you get there so you don’t pay to move it, and then have to get rid of it.

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