If you’ve owned your property for a few years, and you have been diligently paying down your home loan, then there is a chance that you’ve built up some equity. Equity is the difference between the value of your property and the total amount of loans secured against your property. A popular wealth-building strategy is to use available home equity to purchase an investment property.
There are a number of options that can be used to access your home equity to purchase an investment property. Let’s take a closer look at each option:
A popular option is to use the equity that has built up in your property over time instead of a cash deposit. This is usually achieved by using the same lender as your current home loan, who are usually happy to lend a higher amount to cover most (if not all) of the purchase price of the investment property.
For example, if you currently have an $800,000 property with a $400,000 mortgage, then there is $400,000 in equity. Lenders aren’t going to let you borrow the full amount of the equity, as they usually only allow you to borrow 80% of the property value. Read more about that here. If you’re looking to buy an investment property for $400,000, then it may be possible to secure a loan for the full amount of the property (and potentially even enough to cover stamp duty and other costs), avoiding the need for a substantial cash deposit.
The lender will view the total amounts of both property and the home loans, e.g. since you’d have $1,200,000 in property and approximately $800,000 in home loans, your loan-to-value (LVR) ratio would be around 66%… much less than the 80% a lender would generally allow you to borrow.
A home equity loan lets you secure a loan against the equity in your property. You can then use this loan as a deposit for your new investment property. This would allow you to buy an investment property without needing to save up a deposit since the equity in your home would be acting as your deposit.
Other uses for home equity loans include:
Whilst these are all legitimate uses of home equity, this article focuses on using equity to invest in property.
It’s important to be aware that not every lender is the same. Some lenders will apply restrictions to the amount of equity you can access, or the acceptable uses of the equity. Because of this, it is important to partner with a mortgage broker that is familiar with using equity to purchase an investment property, like the team at Pearl Financial. Your Pearl Financial mortgage broker will work with you to understand your property ownership goals, before working with you to identify the most appropriate strategy, including an appropriate lender and home loan.
If you select the wrong lender at this stage, it may prevent you from expanding your investment portfolio in the future.
It’s also important to know your numbers and understand how much you can afford to borrow. Our clients use our Wealth Portal to track their personal finances, which makes it easy to work with your mortgage broker to work out your borrowing power. Check out the Wealth Portal here.
Your Pearl Financial mortgage broker will help you work through your numbers and understand your borrowing power, taking into consideration any potential rent and tax benefits achieved by purchasing the investment property.
Leveraging home equity to buy investments is a strategy that can accelerate your wealth accumulation. However, if you are a first-time investor, it is important to surround yourself with a team of professionals who can help you achieve your investment objectives.
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