Getting a second mortgage when buying a second home

New Zealand has always embarked on its love for properties as a way of building wealth. Buying a second home either as an investment goal or as a holiday getaway is a smart way of making some additional income or wealth to include in the retirement fund. It is just as exciting and equally daunting as buying your first property with the addition of handling two real estates at a time.

There are many reasons that can aspire you into buying your second home like down or upsizing from your current property, supporting a growing family, or starting out a rental property portfolio, etc. Owning a second property can be an appealing prospect and is both a luxury and a challenge. You will need make to some really important decisions when looking at buying your second real estate. In addition, being an existing property owner, you are likely to already have the wisdom from your past purchase experience to draw on. However, effective ongoing market research prior to buying an investment property will help save you thousands.

If you would like to apply for a second mortgage, it is important to keep in mind that affordability checks have become increasingly stern. You will need to prepare evidence to the lender that you are fully capable of covering the cost of two mortgages at once. Is it good to check with a mortgage broker when calculating your capability of buying a second home, as they have the market knowledge and know how to easily deal with the application process.

One of the first steps towards buying a second home is to establish how much deposit do you have. If you have considerable equity in your first property, it can be an excellent start towards buying your next one. The first property can be used as a stepping stone towards the next one, as you have the option to use that equity to fund the deposit for the second mortgage.

Equity is the percentage of your property outright owned by you. It is counted as the total market value of your property minus the outstanding mortgage you owe the lender. This value also includes the amount of profit you have gained in the duration of owning the property. As a general rule, you can borrow up to 80% of your existing property.

For example, if your first property is worth $800,000 and you owe the lender $400,000 on the mortgage, you will have $240,000 in equity you can invest in the new purchase.

To get the best of your existing property, it is advised for buyers to have paid off some of their mortgages to build the equity required to move ahead with purchasing an investment property. A minimum of 2 to 3 years is a good period to starts investing since your first home purchase.

If your current property does fulfill the basic requirements of being used as equity, or if you cannot afford to have two mortgages, you can choose to fully sell it and buy a new one. There can be many underlying conditions for one to consider this option like having to upsize for a rapidly growing family, wanting a new build property, etc. When taking this route, it is best advised to sell the existing property before you buy the next one. This allows you the advantage of knowing the exact amount you have on hand for the deposit and the price range you can potentially search into. With this, you will also have the leverage for being an unconditional buyer, which places you in a solid position to negotiate when you find the perfect property.

There are a lot of different things to consider when buying a second home, our experienced broker would love to help you go through the process and all aspects of purchasing a second property. If you would like to know more about growing your property empire and make your mortgage work for you, talk to our expert broker today.

What role does my credit score play in mortgage application?

Buying a new real estate is hard work in itself and requires financial preparation. There are many steps involved in obtaining a home loan from collecting all the right documents, talking to the mortgage broker, and filling out the application form, all while hunting for the perfect home.

Before you move ahead with all those tasks, one aspect to consider in the process is how your credit score plays a vital role on your chances of successfully applying for a mortgage. Studies have revealed that a vast amount of Kiwis have less than enough knowledge of how their credit score is one crucial factor that impacts their chances of securing a home loan.

For most people, a home loan is the biggest form of a mortgage they will ever get. With it being of such importance, the mortgage lender’s main concern is to find out whether you are capable of paying the debt back. Most lenders will take credit score into consideration in addition to other factors like income, occupation, and age when evaluating your home loan application.

It is important to understand the effect of credit score for borrowers, as the chances of missing out on a better deal can potentially lead to losing thousands of dollars on higher interest rates, or worse getting an outright denial for a mortgage application.

Understanding credit score:

A credit score is a tool that helps lenders find out whether you qualify for a particular mortgage, service, or credit card. It is a numerical representation of a borrower’s creditworthiness or reliability. It shows the lender how well the potential borrower has been managing their finances, including their ability to make mortgage repayments. The score generally ranges from 0 to 1000, from 1000 being the highest score to 0 being the lowest. According to Centrix, one of the main credit reporting agencies in New Zealand, a low credit score ranges from 0 to 494, a fair score ranges from 495 to 695, a good score from 650 to 768, a very good score from 769 to 845, and lastly the highest and excellent score falls between 846 to 1000.

If an applicant falls in between the low and fair range, the lender will proceed with the application with some caution. Some lenders may be willing to grant a loan but may do so at a higher interest than others as the risks involved for them is more.

With the applicants that are anywhere between the good to very good range, the chances of approval on the application are positive. This is also the average credit score of residents in New Zealand.

For the scores that fall within the excellent range, the risk involved for lenders is considered very low with the highest chance of easy loan approval. Lenders are content with applicants of this score and may even offer them better loan options.

The credit score contributes as a vital part of the financial products you take out throughout your life. To ensure that your score stays over the acceptable limit, it is important to understand various factors that can affect and change it.

  • Monthly repayment history: These repayments include everything from finance, credit card, car loans, hire purchases, insurance, student loans to any other form of credit or loan. They also include payment history of daily expenses such as phone, gas, energy, and electricity bills. Any late or overdue payments will most likely have a negative effect on the score, if there are more than one it can have a substantial impact on the score.
  • The duration of one’s line of credit, as well as their newest and oldest accounts and the history of how active these accounts have been.
  • Any new account that has been opened recently.
  • Court notices and judgments under the applicants, in regard to Non-Asset Procedures (NAP), outstanding debts, bankruptcies, and Summary Instalment orders (SIO).
  • The amount of available credit being used and total debts.
  • Your employment history.
  • The number of hard credit searches on the credit report, which appear when one actively makes an application for a new credit or loan. Every time an application is submitted, it leaves a footprint on the credit file which lenders use to make the decision on whether to grant your mortgage.

There are many ways one can improve their credit score. One of the easiest ways to ensure a good score is by making all repayments on time and closing any overdraft credit accounts.

Although having a good credit score is important, a bad credit does not necessarily mean that your goal of owning a property is over. We have worked with clients from all walks of life, reach out to us today if you dream of owning a house, and we can advise and help you find the right mortgage solution for your unique requirements.