Using Equity To Purchase an Investment Property - Pearl Financial

Using Equity To Purchase an Investment Property

By Shane | Investing

Nov 09

It’s common for some homeowners to assume they aren’t able to buy an investment property until after they’ve paid off their family home first. What those people might not realise is that it’s sometimes possible to use the equity you’ve built up in your family home to help you purchase an investment property.

How much equity do you have?

Before you head out and start hunting for a suitable investment property, take a bit of time to determine whether you have built up enough equity. Your equity is the amount between your home’s market value and the outstanding balance on your mortgage.

For example, if your home is valued at $500,000 and you owe $200,000 on your home mortgage, you have $300,000 in total equity.

build home equity

However, you may not be allowed to access all of the equity you’ve built up. Instead, your bank or lender might limit you to a maximum of 80% of your home’s value.

In this case, 80% of your home value is $400,000. If you owe $200,000 on your mortgage, then you have another $200,000 potentially available to help you purchase an investment property.

Stand-alone or cross-collateralised

There are a few different ways to use your equity to purchase an investment property, so it’s important to understand the differences between each option.

One potential option is to refinance your existing home mortgage to unlock the available equity you’ve built up. You can then use that equity as a deposit to put towards the purchase of an investment property.

When you have a ready deposit, you aren’t limited to using the same bank. In fact, you might decide to apply for an investment property loan with a completely different lender, which keeps your mortgages and your properties separated as ‘stand-alone’ securities.

Another alternative is to use a banking process known as ‘cross-collateralisation’. In this instance, the bank uses the equity you’ve built up in your family home as security for a new investment property loan.

Your bank allows you to borrow the entire purchase price of the investment property on a new investment loan, while leaving your existing home mortgage at the same balance. Essentially, the bank takes security over both properties to secure both mortgages.

stand alone cross-collateralised

Which option is best for buying an investment property?

Of course, there are advantages and drawbacks to each option, so it’s important to be sure you seek professional advice. After all, what works really well for one person may be completely unsuitable for your individual financial situation.

Before making a decision about buying an investment property, take the time to discuss your individual financial situation with a qualified mortgage broker. Ask plenty of questions and make sure you understand the options available.

 

Person Giving Keys on Man – Credit to https://toolstotal.com/ by Toolstotal licensed under Creative commons 4

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About the Author

Shane specialises in helping Gen Y professionals and business owners make an impact by accumulating more assets, generating more income, and having more time to enjoy life. He has a Master of Applied Finance, an MBA, and a Master of Financial Planning. He is also a terrible golfer.

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