Q: Can I use equity to buy an investment property?
A: Certainly! It is possible to use your existing home to buy an investment property without dipping into your savings. Using the equity in your home is a smart way of building your property portfolio without feeling the pinch. Here’s a run down of everything you need to know about equity to be a savvy investor.
What is Equity?
Equity is the difference between the market value of your home and the outstanding amount you owe to the bank.
For example, if Joe’s home in Melbourne is worth $500,000 and he has $300,000 to be repaid on his home loan, his equity in the house would be the difference of the two amounts, that is, $200,000.
So, is this full amount of Joe’s usable equity?
No. Banks don’t like to take risks and they will not allow you to use up all the equity in your home. You can calculate your usable equity as 80% of the value of your home minus the amount you owe to the bank.
Joe’s usable equity would be $400,000 (80% of $500,000) minus $300,000, which is equal to $100,000.
Some banks may allow you to cash in more than 80% of your equity if you take out Lenders Mortgage Insurance (LMI). An experienced HashChing broker can help you in this regard.
How much can you borrow?
To calculate the amount you could borrow for your investment property using equity, simply multiply the usable equity by four. In Joe’s case, he can borrow $400,000 using $100,000 usable equity to cover for his 20% deposit and 5% accessory costs.
What to remember before you dip in the equity pool:
- Sound financial advice is key to sound investment. Don’t follow the pack but do your market research before investing in any property. Only invest if you can afford the repayments.
- Having usable equity does not mean you will always get an investment loan. Lenders take into account other factors such as your age, job status and income.
- We recommend that you do not use up the entire available equity at one go. Keep some reserve for the rainy days. You can use up this reserve for maintenance, repairs or saving the day at a later point of time.
- Don’t lose focus from paying your home loan as fast as possible. While the equity you use for buying an investment property may be tax deductible, the remaining debt is not.
3 steps to access equity in your home:
#1 - Find out the value of your house. Often, your house isn’t worth as much as you think. Get in touch with a professional appraiser to know the actual value of your property and calculate what you can afford for your future investment.
#2 – Once you know how much you can borrow, start searching for loan deals. Contact lenders or compare deals online to get the best home loan rates in the market. In case you spot a great deal, why not refinance your existing loan as well? Read here to know more about refinancing loans.
#3 – It is a good idea to take expert help for making the right investment. Using a professional appraiser and a financial advisor can help you make an informed decision.
While due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
