Sometimes, it can seem impossible to make the big decision of purchasing a second property, especially if you have more bills to pay.
Furthermore, it can be daunting to take this decision if you still have the mortgage of your existing home to pay off. This second home could be a good investment or a place for your kids to grow up in.
So, it’s only natural that you want to know how to buy a second property with no deposit. The best strategy we’ve found for purchasing a second home is using existing equity in your primary residence.
You can learn more about the dynamics of this system by reading the article and our guide on investing in property and how to start in property investment.
Ways to purchase a second property without a deposit
Home equity loan
Home equity is a great way to buy a second home with little to no money down. How does equity work? The difference between the present value of your home and your mortgage loan’s outstanding fee is equity. For instance, if you have a property whose current value is $500,000 and the balance of your existing mortgage loan is $200,000, then your equity is $300,000.
Hence, if you want to purchase a second property, you can get a credit loan against your home equity and pay interest. However, whenever you do this, you won’t have access to your home’s equity. Moreover, some lenders will request that you keep at least 20% of your equity to reduce financial risk in case you default on payments.
Moreover, if you want to calculate the amount you can borrow, know how much equity you have. You should get the correct valuation of your property . However, you should always remember that the amount you can borrow from your lender will depend on your financial situation.
Creditors need assurances that their borrowers can repay their loans. Then again, the lender will check your credit card payments, debt, and income.
How to purchase a second property without a deposit using a home equity
You can use your home equity to get a second property in two ways. The first way is refinancing your existing mortgage. Markedly, when you refinance your mortgage, you can increase how much to borrow and buy a second property with the leftover.
However, you simultaneously increase your repayments when you increase the home loan principal. Fortunately, you can change your mortgage term while refinancing if you know you can’t afford the new monthly repayments.
Another way to buy a second property without a deposit through home equity is by going for a second mortgage. If the first mortgage you took is a fixed-rate loan, you should consider taking a second one. However, you should remember that if you take a second mortgage, your current home will have to bear two loans.
Then again, you should thoroughly access how the property value of your second property will affect your budget. Since you will be adding another mortgage loan to your existing debts, you should find out if you will be able to withstand the strain.
Joint ownership
Another way to buy a second property with no deposit is joint ownership. If you have someone who has the means of getting a deposit, you can form joint ownership with them. Although this method will require a down payment, you won’t have to pay any funds.
Hence, you will purchase a second property without making any deposits. Joint ownership has several advantages increasing your home loans approval chances. However, this method might cause some strain if you want to sell the property in the future.
Redraw facility
Redraw facility works when you have a mortgage. It permits you to make excess loan repayments. Then, redraw the excess and use it as a deposit for your second property.
However, not all lenders accept the redraw method. Then again, there is a limitation to how much extra you can add while making your loan repayments. For this reason, you might not have enough money to deposit.
Reasons to buy a second property with no deposit
1. Long-term investment
You can purchase a second property as a long-term investment. While the market will not be still for you to get your deposit ready, you can leverage the no-deposit method to get a property. Hence, you enjoy the benefits of the property as time passes.
2. Short-term investment
If you are an investor with experience and expertise, you can purchase a second property and resell it quickly. To do this, you can purchase a property below the market value and then resell it at a higher price after minimal renovations.
3. Getting your dream home
It’s possible that your first house won’t be your forever abode. As a result, you can get a second property with no deposit. If you see a property with everything you desire in a home, you can use your home equity to get it.
Alternatively, you might not be ready to move out of your current house yet, but getting a second property early can be of great help to you later.
FAQs on how to buy a second property with no deposit
How much money do I need for my second property deposit?
While each lender has their principles, the standard rule is to pay at least 20% of the property value as a deposit. In addition, you won’t have to pay for mortgage insurance through your lender.
However, this is not always the case as some mortgage providers accept a lesser percentage as deposit, say 5% to 10%. But, you’ll have to pay lenders mortgage insurance.
What if I have a deposit to pay for a second property?
If you have the deposit, you can pay it as it helps strengthen your reputation from your bank’s perspective.
Is it wise to buy a second property as an investment property?
Yes, property investment is a good idea, but before purchasing, you need to research and list out all your budget involved in managing this property versus the income you’ll generate. Keep in mind that there will be times when rental income is not coming in.
Liked our investment article?
With the help of our investing guide, we hope you can make a more informed decision on your loan. But feel free to check out our finance section for more guides and tips.
