Fine-tune the finance for second home purchases

If you’re one of those planning to spend this festive season scouting for a second property that you could let out as a holiday home or permanently, you should first establish whether your bank will approve a home loan to finance the purchase – and more importantly, what interest rate it will charge on that loan.
Martin Schultheiss, CEO of the Harcourts Africa real estate group, says many property owners just assume that since the home loan for a second property is being granted to the same borrower, the same interest rate that they pay on their primary residence will apply.
“However, that is often not the case. Even if the property is well-located and your credit record is impeccable, you are quite likely to be quoted a higher interest rate than on your existing home loan.
“What is more, you may well find that your bank requires quite a hefty deposit for the purchase of a second property.”
The reason for this, he says, is that from experience the banks know that if a borrower runs into financial difficulties, he is more likely to default on the loan used to buy a rental property than on the mortgage covering his own home.
“In addition, the repayment of a loan used to purchase a rental property is usually at least somewhat dependent on the owner actually receiving rental income from that property, and there is thus a higher risk attached.
“This is what the bank will be try to offset with a higher interest rate or a lower loan-to-value ratio – and if you hope to argue the point, the only way is to demonstrate convincingly that you could easily afford the repayments on the new property in addition to your other commitments, even if you did not receive rent.
“And to do this, most people would need expert help, which is why we advise clients to spend time with a mortgage originator and an experienced agent so that they can clarify exactly what they’re looking for before venturing out into the market.”

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