How to use your existing property to buy another

Article summary

• Even though you already own a property, you’ll have to go through the same process applying for your next home loan as you did for the first, including a credit check.
• If you sell your existing home, you can use the equity from your existing home to fund the deposit on the new home, granting you a higher chance of bond approval, and a more favourable interest rate.
• Or, you can rent out your existing home and use the income to pay off the bond on the new home.

Purchasing a home is often seen as a long-term commitment, but while it certainly is an important financial decision; it doesn’t have to be for life. Not only is purchasing another property a viable option, but selling your first home can help you in securing it, or renting out your first home can help you pay off your new home loan.

Here’s what you need to know about using your existing property to buy another.

Applying for a second home loan

Even though you already own a property, you will still have to go through the same process as you would if you were a first time home-buyer, meaning that the bank will need to evaluate your credit record, as it did the first time.

Although you may think that getting bond approval the second time around will be plain sailing, particularly if your financial situation has improved, don’t be too sure. The bank’s lending criteria may have changed in the period of time since you purchased your first home.

So even if your financial situation has improved, you should still get yourself prequalified with a home loan comparison service such as ooba home loans. The prequalification process will help you determine what you can afford.

How can your existing property help with the application process?

You may wish to sell your first home and use the equity to pay for the deposit on the second property, thus earning you a higher chance of bond approval and a more favourable interest rate.

However, there’s also the option to keep the first home in the family. You can also use the first home to generate rental income, which can, in turn, be used to pay off the bond.

Using your first home to generate rental income

Bear in mind that most banks do not take potential rental income on the property into account when assessing your bond application. However, if they do approve the home loan, rental income you generate on the property will of course help you pay it off.

Of course, this means you’ll be paying off two home loans at the same time (unless the bond on your first home is already paid off). The bank will take this into account when evaluating your home loan application, and will want proof that your expenses do not exceed your required repayments on both loans.

However, some good-to-know info is that expenses you incur on the existing property will be tax deductible if you choose to rent it out, as these are deemed by SARS as business expenses. These could include: (source)

• Municipal rates and levies
• Property management fees
• Repairs and maintenance
• Premiums for buildings insurance and life cover
• Interest on the bond

So be sure to keep relevant documents, such as monthly rates and tax statements, utility bills, advertising fees and invoices for any repairs and maintenance performed. It is also important to note that any profits made from your rental income are also subject to taxation.

Shop around for the best deal

Whether you plan to use the equity from your existing home to fund a deposit on the new home or not, be sure to shop around for the best deal when applying for a home loan, as doing so grants you a better chance of bond approval and a favourable interest rate.

ooba home loans – South Africa’s largest home loan comparison service, can apply to multiple banks on your behalf in order to secure you the best deal. They also offer a range of tools that make the home buying process easier. Start with their home loan calculators; then use their free, online prequalification tool, the ooba Bond Indicator, to determine what you can afford. Finally, when you’re ready, you can apply for a home loan.