Things to consider when renovating your home
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Learn MoreSo, you've settled into your home, your family is safe and secure, and lately you've been thinking about investing in a second property.
There's just one catch—you don't have enough cash for a deposit, and you don't want to spend years saving for one either.
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Utilising the equity in your home might be the answer, but how does this work?
Put simply, equity is how much you actually own of your current home—the difference between what it's worth and how much you still owe on your mortgage. And when it comes to property investment, it's crucial.
Let's say your home is worth $600 000 and your current mortgage limit is $350 000— your total equity would be around $250 000.
Banks won't lend you the full amount however, so you need to calculate your useable equity—typically 80 per cent of the value of your home, less your mortgage limit (or sometimes more, if you're prepared to take out Lenders Mortgage Insurance). In the example above, assuming a loan to valuation ratio of 80%, the bank value would equate to $480 000 less the current mortgage of $350 000 therefore representing equity of $130 000 that could be used towards an investment purchase.
What does this strategy achieve?
As a general rule of thumb, you can afford an investment property that’s four times the value of your useable equity. In the above example, you could buy a second property valued up to $520 000.
The best part of utilising the equity in your home? You can use the equity in your new investment property to help fund the purchase of another investment property—an efficient way to build a property portfolio.
It sounds simple, but as always, there are things to consider.
What you need to take into account
Firstly, you need to be sure you can afford the repayments on your new mortgage in addition to your current one, or you risk losing one or both properties. It's important to calculate your loan servicing ability before you draw on your equity, as this may have an impact on the amount you want to access.
Secondly, always be aware of any extra charges that you may incur—such as Lenders Mortgage Insurance (LMI), or fees for changing loans or making a new loan application.
Stay on the safe side and keep a financial buffer. If you don't have any funds outside the equity in your home, it's risky to use all of your useable equity in a new property investment. This might mean you have to put property investment plans on the shelf for a while, until you can build up some reserve savings.
Other factors
And remember that even if you have a lot of equity, you won't necessarily be able to borrow against it. Lenders consider a range of factors when determining a loan amount, such as your current income, age, how many children you have and any additional debts.
Finally, if you're serious about property investment, your first move should be making an appointment with your banker. It's essential to plan your financial strategy before you make any investment decisions, and your bank can help you decide whether utilising the equity in your home is right for you. It's also worth speaking to your accountant before making any decisions which affect your finances, and make sure you fully understand the risks involved.
Thinking about purchasing an investment property? Send us an enquiry or call 1300 131 141 to find out more about our how we can tailor a finance solution for you.
