PROPERTY NEWS - When you buy a property with the intention of letting it out and eventually earning an income from it, the banks will most likely only approve the home loan you need at a higher rate of interest than you qualified for on your primary residence.
In addition, they may require you to put down a 20% or 25% deposit before they will consider financing the purchase at all, says Shaun Rademeyer, CEO of BetterLife Home Loans, a South African mortgage originator.
“Many homeowners who are planning to buy a second property as an investment - or even just to rent out until they retire - make the assumption that because they are already a ‘known quantity’ with a good track record of home loan repayment, they will be able to secure a home loan for this purchase on the same terms as the loan granted to buy their current residence.
“However, even if the second property is in an area that the lender also considers a ‘good risk’, they will usually be quoted a higher interest rate, and very often asked for a substantial deposit.”
Nothing to do with credit record
And they should not be offended, he says, because this actually has nothing to do with their credit record or previous behaviour as a borrower. “The banks are just well aware after years of experience that if a borrower ever runs into financial difficulty, he is much more likely to default on the loan used to buy an investment property or a holiday home than on the loan used to purchase the roof over his head.
“In fact, this happened en masse during the 2008/09 recession, and the property market in many coastal towns is still recovering from the glut of repossessed holiday homes and flats.”
In short, says Rademeyer, investment property or second home purchases represent more risk for the lender – and more risk will always be offset with higher rates, or more collateral, or both.
“Many homeowners who are planning to buy a second property as an investment - or even just to rent out until they retire - make the assumption that because they are already a ‘known quantity’ with a good track record of home loan repayment, they will be able to secure a home loan for this purchase on the same terms as the loan granted to buy their current residence.
“However, even if the second property is in an area that the lender also considers a ‘good risk’, they will usually be quoted a higher interest rate, and very often asked for a substantial deposit.”
Nothing to do with credit record
And they should not be offended, he says, because this actually has nothing to do with their credit record or previous behaviour as a borrower. “The banks are just well aware after years of experience that if a borrower ever runs into financial difficulty, he is much more likely to default on the loan used to buy an investment property or a holiday home than on the loan used to purchase the roof over his head.
“In fact, this happened en masse during the 2008/09 recession, and the property market in many coastal towns is still recovering from the glut of repossessed holiday homes and flats.”
In short, says Rademeyer, investment property or second home purchases represent more risk for the lender – and more risk will always be offset with higher rates, or more collateral, or both.
