How to buy an investment property using your equity.
Equity is powerful, how do I maximise its potential?
With the property market still on the rise, many of you now have substantial equity in your homes or investments properties.
The growth in property prices over the last 12 months alone has been staggering!
So why not put your equity to good use and buy an investment property?
Whether you are starting out as a landlord or you are adding to your portfolio – property investing has been a successful investment strategy for many of our clients.
The dream of owning more than one property is very achievable!
Even new home owners might have enough equity in their current home to use as a deposit.
If you currently don’t own any properties, start here instead with this guide on buying a property with no deposit saved.
So, let’s get into it!
Do I need to pay off my home loan before I can access my equity?
Many people mistakenly think they can’t access their equity for property investing as they are still making home loan repayments.
This is absolutely not true – you can still access your equity.
What is equity?
Equity is the difference between the current market value of your home and how much you owe on it (the balance of your home loan).
In this example below, your equity is $300,000:
How do I use the equity in my home?
The equity you have is a is a powerful source of wealth.
You can use the equity in your current property as a deposit against the investment loan.
If this amount is enough to cover 20%, you would be able to borrow 80% of the property value without having to use any of your own cash.
Having the 20% deposit (from your equity) means you avoid paying lenders mortgage insurance.
So how much equity do I have and how do I maximise its growth?
We would suggest the first step would be to get a property valuation report so you know exactly what your bank or lender agrees is the actual value of your home.
This will allow you to see what equity you have available to access.
If you are needing to build up more equity there are a few things you can do to increase it in a short space of time.
For example, do some basic renovations: a new kitchen, a new bathroom or even a facelift with paint could significantly boost your equity.
You can also make extra weekly, fortnightly or monthly repayments to reduce your mortgage. The more you pay in the more equity you build.
What’s the difference between ‘accessible’ and ‘usable’ equity?
A common mistake people make is thinking that they can use all the equity in their homes.
In fact, this is not the case.
There is a difference between accessible equity and useable equity.
Accessible equity is the amount you could potentially access to use to form a part of your deposit for for your investment property loan.
From the example above: our home is worth $1,000,000 and you still owe $700,000, so your accessible equity is $300,000.
On the other hand, the useable equity is usually 80% of the current value less your current mortgage.
So the amount of useable equity you can use as a deposit for your investment property is $100,000 (calculated as $1,000,000 x 80% – $700,000 = $100,000).
As you can see the useable equity is a lot lower but it is still a valuable amount which can be used as your deposit on your investment property.
What are the risks of using equity to buy an investment property?
As with most things, there are also some risks that you need to be mindful of.
The goal is to add to your portfolio and not to risk both your current home or your new investment property.
To maximise and use your equity safely we suggest :
- Having a buffer for uncertain times. This could either be not using 100% of the useable equity or by having additional savings tucked away.
- Research, research, research. Look to buy the investment property in a high growth area and in an area that easily rented.
- Don’t guess speak to a professional mortgage broker to get the best advice and outcome for your individual circumstances.
What kind of home loan will I need?
To buy an investment property, you will need what is called an Investment Property Loan.
We can help you apply for the loan.
Victor Kalinowski, our mortgage broker, is a specialist in investment loans and is happy to chat through your plans and give you hands on advice on how to make these a reality.
At Blackk Finance we are passionate about helping our clients get into the property market, so please go ahead and book a free call with me here.
The information contained within this page is general in nature. It serves as a guide only and does not take into account your personal financial needs. Before you act on this information you should seek independent legal and financial advice. Copyright Blackk Finance 2022.