06 June 2017: Whether you are planning to buy a second house to generate passive income or looking for bigger space for your growing family, there are a few factors to consider to avoid turning your good intentions into a costly setback.
Tommy Nel, Head of Credit at FNB Home Loans, says owning a property or two could be a good step to start building wealth for households; however consumers who are taking this important financial decision should place emphasis on doing proper research to ensure they know what they are getting themselves into.
There are three common scenarios that second time home buyers often find themselves in; you are planning to buy on the condition that you first sell your existing house; you still owe your current bond and require a further loan or your bond is paid up and you are applying for a new home loan.
Nel unpacks some of the important factors that second time home buyers should consider:
Taking out a further loan – two home loans
When buying a second home, banks will perform a new credit and affordability assessment that meets the requirements of the National Credit Act (NCA). This will be based on your credit track record, household budget and ability to afford the minimum monthly repayments.
Managing your own household expenses and property related expenses on a second property, whilst repaying two loans may potentially leave you overextended, increasing the likelihood of not being able to keep up with your financial commitments as they fall due.
It is therefore important to know what you are letting yourself in for and perform the appropriate research in this regard:
- Factor in costs such as insurance, municipal rates and taxes, levies, property maintenance and repairs.
- Managing agents typically charge anything between 8-10% for managing a property.
- It could be risky to assume you will have 100% occupation on a continuous basis.
- The rental price needs to be competitive with other properties in the area. You cannot simply just take your bond installment, add other costs and expect to let your property for that amount. The market often dictates what you can charge.
Conditional offer, subject to the sale of your existing property
This clause stipulates that a purchaser who makes an offer on a house must be given enough time to first sell their existing home.
“However, in tough economic times many sellers are not willing to give up their option to accept offers from other buyers by waiting for one individual to first sell their home,” says Nel.
Moreover, there’s no guarantee that you will sell your home for its current market value. This could result in selling your property for less than its market value, unless you are patient and don’t get carried away with your desire not to lose the property you are trying to acquire.
Paying up the first bond
This may not be a good idea from a tax perspective as you would be unlikely to claim your interest deductions against rental income. Instead, it could be more beneficial to use some of the equity in your primary residence to get the best possible rate on your investment property by putting down a sizable deposit.
“There are many reasons that may lead you to consider buying a second house, such as moving to a safer neighborhood, closer to work and good schools for your kids. Depending on your individual circumstances and affordability level, there are a range of home loan solutions that banks can offer you as a second time home buyer. It is therefore essential to seek expert advice and choose a financing solution that best suits your needs,” concludes Nel.