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Bridging the deposit gap and ongoing mortgage affordability are two big obstacles first time buyers face, and for many it has become a mountain too big to climb.
So, how can you move into your first home if you don’t have a deposit big enough or you can’t afford mortgage repayments? One way, as strange as it may seem, is to buy an investment property and use it as a stepping stone into your first home.
With this in mind, here are 3 ways to you can use an investment property to help you into your first home sooner.
1. Create Rental Income
|You may have found a property you would like to call home but you can’t quite afford to buy it as an owner-occupier just now.The solution – if the property is well-located and is in an area with good rental demand, buy the property as an investment and lease it out. This way, you can get a tenant who will help pay off your mortgage until your finances improve. Once you are on top of your finances and can afford to take on the whole mortgage, you can move in.|
You would have to buy and borrow wisely but this approach would help your cash flow and could accelerate your loan repayment if you combine with your tenant and contribute more than the minimum mortgage payments.
2. High Growth for Capital Gain
More often than not, your first home is not going to be your dream home. To get a foothold on the property ladder, you may need to go down the investment property path first and buy a property you can afford NOW. This does not have to be in an area you ultimately want to live – in fact many people have investment properties in areas outside of where their primary point of residence is.
Buying an investment in a suburb that offers high capital growth potential allows you to sell the property after a few years of solid growth, and you can then use the after tax proceeds to help fund your new home.
If you choose to adopt this strategy, you should aim to find areas that offer potential returns in excess of other asset classes, like online savings accounts. At the very least, aim for capital growth rates of inflation plus at least 2%.
>This can be an effective way to bridge the deposit gap, and if the property performs really well, it could help reduce the amount you ultimately need to borrow to buy your new home. This thereby improves affordability and savings on interest, and will perhaps even save you needing Lenders Mortgage Insurance if you can get the loan-to-value ratio under 80%.
3. Build Up Equity
Similar to my above strategy, buy an investment in a suburb that offers high capital growth. However, instead of selling the property for a capital gain, you can borrow against the equity you have created to help fund your first home.
If you choose to go down this road, you need to be mindful that this option requires you to manage the debts associated with two mortgages, so it is very important that you do your sums and don’t overstretch your financial capabilities.
In closing, here are some important issues to consider if you plan to explore any of the above options further: