Buying Second Home Dilemma

Hey Everyone,

Just looking for some advice on how I can go about purchasing a second home to live in and rent out my first home.

Reasons:
- 2 kids now and the current house is getting too small inside
- want to move to a better area
- want to do it before prices start to climb again

Current status:
- single income on $110k plus
- first home is in negative equity so I cannot really sell without being at a significant loss due to property prices downturn

Looking at a property in the $400k-450k range with approx 10% deposit, I did leverage my parents as guarantors for my first property but don't want to do that again.

Is it possible to make the switch or will I have to rent out my first house and save more?

Do banks/brokers take into account rental income for my first property prior to renting it out?

Comments

  • +10 votes

    Advice not advise

  • +10 votes

    the negative equity in your home will hurt you, but yes they'll work out your income by including forecasted rent

    •  

      Thanks, after some more thought crunching the numbers I probably cannot do it just yet. Need another 50k plus 10-15k income raise which will take me another year or 2.

  • +15 votes

    You don't really look to be in a position to purchase a second home.

    Maybe suck it up for a while and pay extra onto your home loan until you have equity?

    •  

      Thanks, after some more thought crunching the numbers I probably cannot do it just yet. Need another 50k plus 10-15k income raise which will take me another year or 2.

      Is it worth putting money into the current loan though? I feel it would be better to raise cash in an offset for the next house rather than paying the current property down faster.

      •  

        If you have offset account. Yes leave it there, you can pay off the loan anytime. Though make sure you are very discipline with using the fund.

        For short term period, it is better to rent in a new place and lease the existing one. See at least you can afford the rental because owning a home is more costly than renting and less flexible.

  • +1 vote

    https://www.ato.gov.au/Individuals/myTax/2018/In-detail/Rent...

    Some rental property owners borrow money to buy a new home and then rent out their previous home. If there is an outstanding loan on the old home and the property is used to produce income, the interest outstanding on the loan, or part of the interest, will be deductible. However, an interest deduction cannot be claimed on the loan used to buy the new home because it is not used to produce income. This is the case whether or not the loan for the new home is secured against the former home.

  •  

    What state? to give you an idea on a recent example I saw… A single income 140k pa incl super etc. could purchase for 640k with 20% deposit. So 128k deposit and 512k lending.

    Deposit can come in anyway. I.e. cash or equity. The applicant had a second property that was positive equity (I.e. greater than 80% LVR) and positive geared rental income greater than the loan repayment.

    •  

      WA, unfortunately my house is in negative equity at the moment so I think I will have to raise more funds for a 20% down payment.

  • +3 votes

    If you couldnt get the 1st loan without a guarantor, and that loan is upside down, since you owe more than the place is worth, there is almost no way you are going to get another loan for a new house unless your income supports it, and it doesnt seem like it does even with the 1st place being rented.

  • +2 votes

    I think you will get yourself into a lot of financial hurt with this. I don't know all your figures but based on what you have told us I don't believe you are in a good position to have an IP and a PPR.

    If you had a lot of equity in your current house my opinion would probably differ.

    •  

      Yeh unfortunately the market did not go the way I expected however its been a big learning experience for me, need to increase income as well as down payment for the next year or so.

  • +2 votes

    Is it possible to make the switch or will I have to rent out my first house and save more?

    TL;DR No its not possible.

    You're under water on your first time house, renting it out most likely won't cover the mortgage and outgoing, aka it'll become negative geared. So your wage will need to support this mortgage as well as your new mortgage.

    Do you neve have $50k in cash to buy the new one?

  • +1 vote

    Your wage doesn't suggest you could service an additional mortgage.

    •  

      Yeh I do feel my wage will be increasing around 10-15k over the next year so I may just need to hold out for now. The other alternative would be to switch employers in which I could get a 20k+ jump instantly but then I would need to be there for year or so plus dealing with new work conditions.

      •  

        Still doesn't sound like enough when you have 2 dependents and an existing mortgage with negative equity - which btw I don't believe at all that the market "downturn" had any real impact on why you do not have any equity in that property.

        •  

          Property downturn was not the sole factor yes I agree but it definitely had an impact, property is worth 80-100k less than what I purchased it for and loan has been paid down around 40k. I should have paid more down on it yes but my income was 40k less when I bought the property and several other factors attributed to this as well.

  •  

    You'll be down -4% on the transaction cost and like others said, on a $110k income the bank will knock you back.

  • +1 vote

    Is extending your current house an option?

    •  

      It seems like they overpaid for the property in the first place, extending it would be throwing away good money after bad as it wont increase the value of the property.

    •  

      Hmm I dont think that would work, over capitalizing with not alot of chance of any return.

  • +1 vote

    What about a second income into the home?

  •  

    Sounds like you can’t afford a relocation. Just stay put and make do. Worked for all of us.

  •  

    If you're earning $110kpa and your $250-$300k (?) home loan is in negative equity and you've been unable to pay it down (?) or save more than $50k (?) over the last 10 years (?!?) then you absolutely should not take on an extra $500k loan even if the bank would give it to you.

    As you can see I've had to make a bunch of assumptions because you didn't provide important details.

    •  

      Ive paid it down 40k and saved another 50k cash. Had the property for 5yrs now. Only in the 2 yrs has my income crept up to pass 100k. Bought it 360k but now at a guess maybe its worth 280k if im lucky.

      •  

        Still not giving relevant details. So… $360k value on purchase. Let's say $375k after associated costs in the purchase. And assume an 80% LVR. So the loan was for about $300k. And you've paid down $40k so now it's about $260k. But you say it's now maybe worth 280k and you're negative equity so that's not right. So you got a 90% LVR? I'm surprised you could get that 5 years ago.

        OK. So let's assume the loan is currently $300k. And we'll assume you have no other loans like car loans and low credit card ceilings (let's say $5k combined).

        And you want to take on another ~$450k loan with ~90% LVR.

        I would be very surprised if anyone would give you this. You'd have a better chance selling the existing one and buying the new one but even then I doubt it.

        So I'd set about saving, hard. You'll probably get around $85kpa after taxes. I'm guessing the loan eats about $18k of that. Plus rates/strata/water/home insurance another what, $3,500? Then utilities and… we're just getting into a budgetting plan at this point. I'd suggest that's what you do. Budget out thoroughly. Cut everything you can. Save like a mad man. If you have the option on the loan put the money it's offset or on the loan if you have free redraw, $50k extra will cut the mortgage repayments down to $16k.

        But yeah. You're probably a good 18+ months of hard saving away from a good option. Sorry.

  •  

    Provided you have the discipline not to spend your savings, much better off having it in the offset until you are ready to purchase the second property.

    Then you can make the decision at that point if you need to pay down loans.

  • +1 vote

    I just want to point out that you are likely in FOMO mode (fear of missing out) because of "want to do it before prices start to climb again" .

    1. Run the number with your accountant and then your broker.
    2. Find out how much risk you could take on when the brown stuff hits the fan.

    Please figuring these two questions out before buying anything in the market. Otherwise you might find yourself facing more stress down the track.

    It would not be fun.

    • +1 vote

      I don't think anyone in WA has FOMO on properties.

      •  

        There are so, so many. The predictions of the imminent upturn in the WA market are constant.

        • +3 votes

          Yet these predictions never come true. As they say in the sharemarket, the trend is your friend.

          •  

            @capslock: How can you think this and also think there's no-one with FOMO? Like, you recognise people are making bad predictions but you reject the idea that people… are… making those predictions… what?

  •  

    Worth keeping in mind that mortgage brokers (well the ones I've used) generally want 3 months minimum of payslips, bank statements for transaction and savings accounts…so even when your income increases, you may have to hold tight for a bit longer.

    Perhaps you should just rent out your house and find a rental property in the area that you want to live in (assuming your mortgage is covered).

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