Depending on your circumstances, one option you might want to consider is keeping your first home as an investment property. Although there are often emotional reasons for holding onto your first home (perhaps it’s where your children were born), it’s important to make sure the numbers stack up as well. Here are some important points to keep in mind.
Does your home have rental appeal?
First things first – what sort of rental return could you get on your home and how easy will it be to rent? When you bought your home, you were likely focused on finding a place to live rather than what its appeal would be to a wider rental market. Take the time to think about how it stacks up for potential tenants. Is it near public amenities such as shops or transport, or does it have “quirks” that would put potential tenants off?
It’s a good idea to reach out to property managers in your area to get an idea of the rental appeal of your place as well as an indication of what it could rent for.
It’s also important to consider the potential rental yield of your investment property as this will influence the amount of cash flow coming in which can be used to service your loan repayments.
What’s the potential for capital growth?
If you intend to sell your first home further down the track, do your research about capital growth trends for similar properties in your area, keeping in mind that previous sales aren’t a guarantee that prices will remain on the same trajectory. It’s important that you also weigh up any capital gains tax considerations should you intend to eventually sell – make sure you seek out the appropriate professional tax advice for your circumstances.
The six year rule
As the name suggests, the six year rule means you could rent out your primary place of residence for up to six years and keep its capital gains tax free status. Once the six years has past, the Australian Tax Office (ATO) would treat your home as an investment property, meaning it would be liable for capital gains tax should you eventually sell it. Once again, it’s important you get professional tax advice to understand all the details as well as the personal implications of this for you.
Home loan considerations
If you keep your existing home, you’ll need an entirely new home loan for your next place. Just as your circumstances have likely changed since you bought your first home, it’s likely your home loan needs have changed as well. You can view and compare all our home loans to see which loan has the features to suit your needs.
The amount you can borrow will depend upon a number of different factors such as:
- The equity you have in your existing property.
- Your ability to service your current home loan on your existing property plus the new loan amount.
- The total amount borrowed across both loans compared to your properties’ valuations (this may mean you need Lenders Mortgage Insurance).
Using equity in your current property to buy a second home?
When buying your second home, you could use the available equity in your current property as your deposit. Equity in your home can be built up by paying off the amount you owe on your loan, or if the value of your current property has increased since you bought it. This equity can be used instead of a cash deposit when buying your second home.
The more equity you have in your current home, the greater the amount you can borrow to put towards buying another home (this is often referred to as your borrowing power). You can estimate your borrowing power with our mortgage calculator.
Things to keep in mind when using equity to buy a second home
When thinking about buying a second home and renting out your first home to cover your existing loan, it’s a good idea to have a cash buffer.
Deciding how much you’ll need depends on a number of factors, including:
- How much will you need to cover repayments?
- How long are other properties in the area often vacated between leases? Do you have enough cash saved to make the repayments should it be untenanted?
- If you’re on a variable rate home loan, are you able to service the loan if rates increase?
- Do you have enough funds to cover any emergency repairs?
- How long can you cover the loan repayments if your personal circumstances change
If you decide to keep your current property and buy another home, you should consider your own needs, circumstances and any unexpected situations that could arise.
Things you should know
Credit criteria, fees and charges apply. Terms and conditions available on request. Based on Westpac credit criteria, residential lending is not available for Non-Australian Resident borrowers.
This information in this article has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information and, if necessary, seek appropriate professional advice.