Should You Remortgage To Buy A Second Home?

‘You don’t need capital to invest in real estate’.

If you are in the real estate business, you most likely hear/say this mantra over and over again and rightly so. This is the reason so many people delve into the real estate business and build wealth to secure for retirement and achieve financial freedom. Real estate investors have access to different financing options based on their financial history and credit score. If you prefer conventional means, taking out a bank loan is your best bet to buy an investment property. If the bank isn’t a feasible option, look into hard money loans as another viable option.  

In this post, we focus on remortgage to buy a second home and build wealth in real estate. This is a sound financing option, but not for everyone. It is crucial real estate investors study the benefits and drawbacks of a remortgage to buy a second home based on their current financial situation and long term business plan.  

What is A Remortgage?

In a nutshell, a remortgage is taking out a second mortgage based on your home equity, or in other words, you remortgage to buy a second home based on the value of your home, less your loan debt. You are taking on more mortgage debt against your own home.

For example, if your house is valued at $500,000 and the current debt owed is $250,000, the equity you own will be $250,000. So, you can use the $250,000 as equity used as a deposit on a second home, while your current home is used as collateral for your new debt.

If you want to buy an investment property and kickstart a real estate business, taking on a remortgage to buy a second home might be a feasible option to earn a surplus of rental income, which can be more than enough to cover your overall expenses and still be very profitable.

Use Your Home Equity to Buy Rental Property

If you have a good credit score and a stable source of income, there’s good chance a remortgage to buy a second will be approved by the bank. On the contrary, borrowers with a bad credit score or small mortgages may find the process of applying tedious and very time consuming for a remortgage that is not worth the hassle or the money to buy a second home.

But with all this said, real estate investing requires lots of planning and much due diligence. For starters, have a business plan with incremental goals before you decide to remortgage to buy a second home.

To be a successful real estate investor, you must capitalize on the best real estate investments aligned with your business goals and vision. Investing on a whim is frowned upon and will only lead to bad investment decisions and burn a hole in your pocket. Real estate investing for beginners won’t be easy, but it is doable so long as you stay on a steep learning curve and seek professional advice from mentors and/or real estate agents to help you get started.

So before you consider a remortgage to buy a second home, ask yourself the following questions:

1.  How much equity do I have in the house?
2.  Can I qualify for a remortgage plan based on this equity?  *NB: You won’t qualify to remortgage to buy a second home if you own less than 25% equity in the house.
3. Is this a good timing for a remortgage to buy a second home?
4. Can I commit to the interest payments?
5. Is the remortgage to buy a second home the only financing option for me?

The Pros and Cons of Remortgage to Buy A Second Home

4 Benefits of a Remortgage to Buy a Second Home

1. If your equity will suffice, you have the ability to borrow at a lower interest rate.
2.  Your home equity can be used as leverage to buy an investment property to start your real estate business.
3. A remortgage plan might give you better terms, more suited to your financial situation.
4. A remortgage can consolidate your debt into a single monthly payment.

4 Drawbacks of a Remortgage to Buy a Second Home

1. With a remortgage to buy a second home, you will elongate the duration of your loan and debt repayments.
2. You are risking losing your house if you cannot commit to paying off the debt.
3. Be well aware of the extra fees that come with a remortgage plan which might counter the benefits of a lower interest rate on the loan.
4. To get approved for a remortgage to buy a second home takes weeks to complete, so don’t count on getting it overnight.

To reiterate, a remortgage to buy a second home is not for everyone.  It is important to weigh the pros and cons before moving forward with the remortgage process. For homeowners, there is a lot at stake for using your house as collateral, hence why the decision to remortgage should not be taken lightly.  

Conclusion

All in all, deciding to remortgage to buy a second home is completely up to you and (most importantly) your friendly neighborhood bank. Weigh your options and discuss it further with your bank to see the most feasible financing option to kickstart your real estate business for the least amount of incurred risk.

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