How to Use Equity to Purchase an Investment Property?
Jul 27, 2021
If you’ve purchased your first property and have built up your equity over the years, you may be in the position to buy an investment property.
Equity is how much of your home that you actually own, taking into consideration its current value and how much debt you have remaining on it. Quite often you’ll be able to access this to purchase a second property, rather than making a cash deposit.
This means you can skip the tedious task of saving up for a deposit, and instead use your current property as security on your new property. But before you do so, there are several steps you need to take before you can make an informed decision on whether to access your equity.
Calculate how much is available and accessible
Equity is the difference between the value of your house, and how much more you owe on it. So if your home is currently worth $800,000 and you still owe $300,000, your equity is $500,000.
Inflation, the housing market and changes to your neighbourhood can all impact the value of your home. Look at real estate listings in your area and work with an agent to get a valuation and understand the current value of your property.
Banks most commonly will lend you 80% of the value of your home, minus the debt you owe. This is to avoid handing out a loan that’s higher than the value of your property if the value were to decrease down the track.
If your home is worth $800,000, 80% of its value is $640,000. If you’ve still got $200,000 left to pay, then you have $340,000 usable equity. For a quick and easy way to determine what your budget should be, borrowing power calculators available to give you more detailed insight.
Research your loan options
Once you’ve established your usable equity, it’s time to start researching your loan options. You should discuss your options with a financial advisor, who can help you decide on the type of loan you should get for your investment property.
If you take out a principal and interest home loan, you will also be able to build equity in your investment property. This will put you in a position to possibly buy more investment properties down the track, especially if the value of your properties increases.
Uncover fees and costs involved
To properly budget for an investment property, you need to be aware of any fees and costs involved with accessing your equity.
This will depend on your bank, how much equity you borrow and the cost of the property you want to buy. For example, if you wish to access more than 80% of your usable equity you’ll have to pay for Lenders’ Mortgage Insurance.
If you do end up switching to another lender, there’ll be various fees associated with this. Make sure that the savings you’ll make by changing lenders aren’t outweighed by the fees of doing so.
You’ll also need to consider what type of investment property you want and the associated costs. If you plan on buying a development property that you hope to renovate and sell for a profit, make sure you can stick to your budget and don’t risk spending more than you can earn back.
Making your first property investment can be an overwhelming process, and mistakes can be made. Keep in mind that your bank will take into account a variety of other factors, such as any other debts you have, your income and your age when deciding whether you grant you access to your equity.
If you are able to access it, trying to find cheap houses for sale for your first investment will minimize the risks and may be a good starting point as a newcomer. You can discuss all of this with your financial adviser and make the best decision possible for your current circumstances.