How to plan for an investment property when you have mortgage repayments

An overview of how to plan for an investment property when you have an existing mortgage

Are you on the hunt for a second property? Whether you’re looking for an investment property or you're keen to upsize and turn your current home into a rental, it’s important to do your research to make sure you can keep up with mortgage repayments and expenses for two properties.

Read our guide to learn more about buying a second home and staying on top of your mortgage repayments.

Budgeting for an investment property

Before you start looking for a second property, it’s important to start by running a few numbers. Essentially, to make sure you can afford to buy an investment property and service two home loans, along with the other ongoing costs that come with owning a home.

Take a look at your current financial situation, including your income, expenses and debts as well as your credit score. You can run these figures through a borrowing power calculator to get an idea of how much you might be able to borrow. Or, you can take it one step further and approach your lender for conditional approval to get a more concrete idea of what they’re willing to lend you.  

Be sure to also consider the upfront costs that come with buying a property and factor them into your budget too. Once you know what you can afford, you’ll have a better idea of what price range you should be looking at for a second property.

Funding an investment property

One of the main bonuses of already owning an existing property is the potential to use the equity in your current home to fund the purchase of an investment property. Rather than trying to save up enough cash for a deposit while also balancing your existing home loan, you can continue making your regular repayments and grow your equity. Eventually, you could have enough to be able to stump up a 20% deposit for an investment property.  

When you buy an investment property, you might need to take out a second home loan. With this in mind, it’s important to make sure you factor in the cost of establishing another mortgage along with your deposit.

Turning your home into an investment property

If you’re planning on buying a second house and renting the first, there are a few key points to consider.

Assessing rental appeal

Firstly, does your home have rental appeal? Determining whether or not your current home would make a suitable investment property can make all the difference to how easy it is to rent out. Not to mention, depending on how appealing your home is, you might even be able to command more rent for it.

Here are a few questions to ask yourself to figure out whether or not your home would make a good rental:

• Is your home located in an area that appeals to renters?
• Will it be easy to find and keep good tenants?
• Is your home close to amenities, like public transport, shops, parks, schools and other facilities?
• Does your home have any issues that could put renters off? Can you fix them?
• Does your home need any repairs, improvements or renovations to bring it up to scratch before you can rent it?

Calculate your cash flow

Before buying a second home and renting the first, it’s worth considering the additional costs you’ll need to account for. While your rental income should go some of the way to covering these expenses, depending on how your investment property is geared, there may be a shortfall that you’ll need to cover.

Consider costs like:

• Mortgage repayments: Include principal and interest payments if you have a mortgage on the property.
• Property management fees: Hiring a property manager typically costs around 7-10% of the rental income.
• Repairs and maintenance: Allocate funds for ongoing repairs and maintenance. A good rule of thumb is to set aside 1-2% of the property value annually.
• Council rates: Local government rates for services such as waste collection, water supply, and sewerage.
• Insurance: Landlord insurance to cover property damage, loss of rent, and liability.
• Strata fees: Applicable if your property is part of a strata scheme (e.g., apartment or townhouse complexes).
• Utilities: If you cover any utilities for the tenants, include these costs.
• Advertising and letting fees: Costs associated with finding and placing tenants.
• Legal and accounting fees: For professional advice and tax return preparation.
• Interest rates: Keep an eye on interest rates, especially if you have a variable rate mortgage, as this can impact your mortgage repayments.
• Vacancy rate: Account for periods when the property may be vacant. A conservative estimate might be around 5-10% of the year.
• Rent shortfall: If the rental income isn’t enough to cover the mortgage repayments and other rental expenses, you’ll need to be able to cover the difference.

Consider tax implications

Another important factor to take into account is the potential tax implications that come with turning your primary residence into an investment property. For starters, you might be able to write off a number of costs as a tax deduction if they’re considered an investment expense. This can include things like:

• The interest component on your investment loan,
• Property management fees,
• Repairs and maintenance,
• Insurance, including landlord insurance and building insurance,
• Depreciation on capital works as well as plant and equipment,
• Council rates and taxes,
• Travel expenses, and
• Legal fees.

Before you claim these investment expenses on your tax return, it’s important to understand which expenses can be claimed immediately and which expenses need to be claimed over several years. You can learn more about the different rental expense categories on the ATO website.

Whether you’re looking to buy a second home or refinance your current home loan, Unloan is here to help. Our new kind of home loan product is designed to save you more. Plus, with a range of great features, you can take advantage of competitive interest rates, an annual discount and different loan configurations to suit your needs.

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking independent taxation and financial advice before making any decision based on this information.

Tax law is complex and subject to change. For the latest information, check the ATO website or with your accountant or financial advisor.

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000.

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.

* Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.