How to use equity to buy investment properties?
Properties with equity…what is equity? Equity is the difference between what your home is worth and how much you owe on it.
For example, if your home is worth $500,000 and you owe $200,000, you have $300,000 in equity. As you continue reducing the amount you owe on your home or value of your home grows (capital growth), your equity increases. It’s that simple.
Properties with equity and how to get equity to build wealth through property investment. Unlocking equity in your home can be an effective way to assist in purchasing rental property to help build your wealth.
Residential investment properties are a popular investment vehicle providing investment funding in the form of capital growth and rental income…
Properties with equity, what if you’re already a home owner? Firstly, you may not need to provide a deposit to fund the purchase of your next investment property. Imagine if you could leverage and harness the power of your home equity…
Home equity is the difference between your home’s market value and the balance of your mortgage.
What if you’ve owned your own home for a few years? There’s a good chance you have by default already built-up some reasonable equity (in context to capital growth), and this can be a valuable resource when it comes to buying property investment.
Here’s how it works. Let’s say you want to buy an investment property with a market value of $400,000. There are also additional purchase costs (legal fees, stamp duty and so on) of $20,000, bringing the total cost to $420,000.
Assuming that you meet the loan approval requirements, a lender fund 80% of the property’s market value (potentially more if you are prepared to pay Lenders Mortgage Insurance LMI)…
Meaning the bank lends you $320,000 to buy the investment property. As the total cost of the property is $420,000 you still need an additional $100,000 for the deposit. This can come from the equity in your existing home.
Let’s say the market value of your existing home is $500,000 and the balance of your mortgage is $300,000. The difference between the two is $200,000, which is your home equity.
Properties with Equity in context to an investor because it means you can access up to 80% of your home equity (without the need to take out LMI), which equates to $100,000 in this example .
Instead of coming up with a cash deposit for the additional $100,000 needed to buy the investment property, you can take this from the $100,000 of accessible equity in your existing home.
The available equity in your home is calculated at 80% of your home (without the need to take out LMI) less any current loans, which equates to $400,000 less $300,000 = $100,000.
Alternatively some lenders lend to 90% of the property value less the existing mortgage, where lenders mortgage insurance would be paid on the amount borrowed over 80%.
You should note many property investment gurus say it is important to repay the loan on your home as soon as you can.
The equity which is drawn down from your home to purchase an investment is tax effective, however any remaining debt on your home is not. Therefore the loan on your home costs you much more on an ongoing basis than the loan on your investment property.
Properties with equity…property you live in is not the only source of home equity. You can also use the equity in an existing investment property to help fund other property purchases/buying investment property.
Contact your mortgage broker to help you work out how much equity you can access in your property and how it can be leveraged as a source of funding for your next investment property.
Properties with Equity