For homeowners wanting to invest in another property, it may not be necessary to provide a cash deposit at all. You do not even need to pay off your home loan before starting a new property investment.
Equity is one of the most powerful resources for building your property portfolio. If you have enough of it built up in your current home, you may be able to use that in lieu of a cash deposit.
What is equity? How much of it do you need for an investment property?
Beginners Guide to Using Equity in Property Investment
To start, equity is the difference between the amount you owe on your home loan and the current value of your home.
To illustrate, say your home is worth $700,000 and you owe $330,000 on your mortgage. Your equity is $370,000.
You can tap into equity and use it as security with the banks when you want to finance big purchases including:
- Home renovation
- Capital for business
- Car loan
- Vacation
- Investment property
As you reduce your loan amount with principal and interest repayments, and if the market value of your house increases, so can your equity increase over time.
Using equity to buy an investment property
It is important to remember that not all of your equity can be accessed and borrowed against. There is what we call usable equity or the equity in your home that you can actually borrow for an investment property.
As a rule of thumb, the maximum home equity you have available as deposit is 80% of your property’s current value. Subtract the value you still owe on your mortgage from this, and you get your usable equity.
Using the previous example to illustrate, your home’s current value is $700,000. 80% of $700,000 is $560,000. Your usable equity is the difference between 80% of your home’s current value and the $330,000 you still owe on your mortgage, which is $230,000.
How to use your home equity to buy an investment property
After you calculate your usable equity, the next thing to compute is the amount you can borrow for your investment property.
To do this, use the rule of four: multiply your usable equity by four to get your maximum purchase price for an investment property. For example, your usable equity is $230,000. Multiply this by four and you get $920,000.
You can borrow this amount from banks and lenders to cover for the 20% deposit and purchase costs such as stamp duty, legal fees, and more which amount to approximately 5% of the purchase price.
Another crucial thing to consider is that some lenders may not always allow you to access your equity even if you have enough of it built up. Lenders will look past your usable equity to factor in your age, job status, number of children, current debts, and income.
Chat to us about a health check
That is why you have to do your due diligence and start researching and assessing your home loan options with a mortgage broker. They will do a “health check” on your existing home loan and compare it based on factors including interest rates, fees, and features against other options from your current lender or other lenders.
Get the advice of refinancing specialists
As tempting as it is to leverage your home equity, it is best to play it safe and not use it if you do not have any funds outside your home equity. Protect yourself and always have a buffer or back up funds in case things do not work out the way you want.
Your equity is a valuable resource, and using it to buy an investment property can be a smart move. But to make an informed decision, it is best to talk to a financial advisor to navigate your options.
Contact the friendly, experienced mortgage brokers at Sunshine Coast Financial Solutions today.
