Buying another house generally means you will be taking out a second mortgage.
Taking out a second mortgage to buy a house
June 30th, 2010
Buying a second house can be a dream for many people, and with rising equity it can suddenly seem to be in reach.
This is because it may now be possible to increase the mortgage on the main property in order to buy a second home. There are a number of ways of doing this. Either the existing mortgage can be extended, or a second mortgage can be added to the old mortgage or a totally new mortgage can be taken out on the house incorporating the remains of the old mortgage and the required new money.
There area a number of ways of increasing equity in a property. Paying off a mortgage faster than planned is one of these ways, in effect a savings program although the interest rate rewards are actually quite high. Another way is to do work on a house that increases the value of the house through redecoration or extensions, which can be expensive but can increase the equity in the house quite markedly. The final way to increase the equity in a house is to simply let the house price rise along with the rest of the market.
In all of these ways the equity can rise within a house. While it has been quite common to use the main house as a way of raising equity to buy new houses through a deposit, in some cases it has been possible to use the equity in the house to buy a completely new house.
A home owner should be careful that this is not regarded as free money. The money has to be paid back, at interest. It has often been the case that in order to retain the same amount of repayments that the term of the loan gets extended. This has two dangers. The first is that the interest runs on for longer and so will mount up, in the long term. Another danger is that the term may be extended far beyond the intended retirement date, which in effect will postpone the retirement. As many people buy a second home for retirement, this could be unfortunate.
Taking on a second loan increases the chance of losing the main house as there will be a bigger mortgage on the house that will be harder to pay back. Getting a mortgage on the second home will not have this problem.
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