Buying a second home? What to know before you start.

Firstly, congratulations! To be considering buying a second home is a huge milestone. Buying a home whether it’s your first or second isn’t exactly a walk in the park, but we can help you feel more informed as you venture on what should be a pretty exciting journey.

If you’re buying a second home, you probably fit into one of three categories:

1. You’re buying your second home before selling your first
2. You’re selling your first home before buying your second
3. You’re keeping your first home and buying a second

Each category has its own set of benefits and watch-outs, which we’ll lay out for you now…

Buying your second home before you’ve sold your first

Like most things in life, timing is almost never perfect. It’s likely you’ll need the money from selling your first to home to be able to pay for your second. One option is to get a bridge loan—these are high interest, short term mortgages that are designed to carry you through until you sell your current home. Paying two mortgages at once can be tricky, and the high-interest rates aren’t ideal, but they can be a good option in certain situations.

What tends to be best for the buyer is a conditional contract, where purchasing your second home is conditional on selling your first. Your lawyer will put this together for you, but generally, they look something like this:

• You pay a 5–10% deposit after signing the contract—if the sale falls through, you’ll get this back.
• You then have 6–8 weeks to sell your current home. It’s important that you actively try to sell your home. If the time lapses and the seller can prove that you haven’t put the effort in, you could lose your deposit.
• In those 6–8 weeks, if another buyer offers a higher cash sale to the seller, they’re allowed to accept (this is called a cash-out clause) but before they do, they must give you the opportunity to pay the cash price.

It’s worth noting that unconditional contracts are often going to be favoured by the seller as there’s less risk for them and the sale can go through quicker. The housing market swings like a pendulum—sometimes it favours buyers, sometimes sellers. Currently, it’s a seller’s market. The bad news is that in this market there may be another buyer who is able to go unconditional on a house you’re interested in. The good news is that you shouldn’t have much trouble selling your current house quickly. This brings us to this next scenario…

Selling your first home before you’ve bought your second

Again, getting the timing right is hard! There are pros and cons to selling your current home first.

• Pros: You’ve got the money ready to roll! You have an exact budget to work with and you have the advantage over other buyers who may need conditional contracts.
• Cons: You need to find somewhere to live in-between homes. Renting can be costly and with the market in favour of seller’s right now, you may have some competition when it comes to buying your next home.

One option is a conditional contract. It works a lot like the one above, but the condition is that you must find a second home before you go through with the sale of your first. Your lawyer will put this together for you if you choose to go down this route.

You’re keeping your first home and buying a second

If you’re choosing to own two homes, you’re probably in one of two camps:

1. You’re buying a holiday home
2. One of the homes will be an investment property

If you’re buying a holiday home, congratulations—you’re living the Kiwi dream! Your own little slice of paradise to escape to when you need a break from day-to-day life, just imagine it.

If you’re thinking that a bach could also be an investment, it could be—in the right circumstances. Consider the following first:

• Renting opportunities tend to be seasonal, so you’ll have to make a call on whether you get to enjoy the bach yourself or rent it out to others. A lot of lenders are also unlikely to factor in holiday home rental income when deciding on your loan.
• Look at the historical property prices in the area you want to buy in. How much have they gone up? Unless you’re choosing to buy in a really desirable location (which will be reflected in the price tag), the answer is probably not much.

If an investment is your main driver, rather than a nice place to holiday, you’re better to go down the full-time rental route.

Taking on an investment property is great if you can be sure it’s going to produce a good return. Before buying a second property, we recommend asking yourself the following questions:

• What can I realistically charge for rent based on the location and similar homes in the area?
• What are the costs involved in maintaining the home and what kind of financial buffer do I need for anything unexpected?
• Am I fully aware of the rights of tenants versus the rights of a landlord? You can read more about that here.
• Am I ready to take on the responsibility of tenants?
• What will a property manager cost if I choose to use one?

Once you’ve weighed up all the above, done the maths and concluded that the investment is going to work in your favour, then it’s time to think about mortgage and tax structures—that’s where we can help.

Whether you’re buying a second home, bach or an investment property, we can help you navigate the process and find a home loan that works best for your unique circumstances. We’re in the business of lending possibilities and we work with some of New Zealand’s most trusted lenders to do it. If you want to get a better idea of your options, get in touch. One of our advisers will be happy to have a chat.

This blog is provided for general information purposes and is not a recommendation you enter into or exit any particular loans or insurance policy. Information on the website does not consider your particular circumstances, including your objectives, financial situation or needs. We recommend you seek advice from a financial adviser before taking any action as appropriate. The Lending People Limited (FSP240365) is a licensed financial advice provider and can provide advice on some types of personal loans. Find out more about The Lending People and how we may be able to help you.