April 29, 2020
Investing in property is the new Australian dream – we love building wealth through bricks and mortar. And really, a well-chosen property should rise in value over time (called ‘capital gains’) without much effort from the owner.
The big question is, how can we build our investment portfolio using the value in our current home?
Purchasing property requires cash deposits, and if you want to purchase multiple properties, that’s a lot of cash to have lying around.
Using your home’s equity to invest
If you’ve had your home for a while, chances are you’ve built up valuable equity. That equity can be used as a cash deposit to buy an investment property, with most investment property loans structured around using home equity to aid the purchase.
What is equity?
Simply put, equity is the value of your property minus the amount you owe to the bank. Let’s say your property is worth $500,000, but you still owe $200,000. This means you have $300,000 worth of total equity in your current home.
Here’s how it works
In the past, the only way to purchase a new property without a cash deposit was to sell up. Now, home loans are pretty flexible, and it is possible to make use of home equity without having to sell.
Typically, the lender will lend you 80% of the value of your home without paying Lenders Mortgage Insurance (LMI), less the debt you owe against it – which is your equity. However, the amount of equity you can use will vary between lenders – something your mortgage broker can help you figure out.
Let’s take a look at an example:
You’ve found an investment property worth $400,000.
Additional purchase costs (legal fees, stamp duty etc) bring the cost of the property to $420,000.
Assuming that you meet the loan approval requirements, the lender will loan you 80% of the property’s market value of $400,000 without having to pay Lenders Mortgage Insurance (LMI).
Let’s do some calculations:
- Market value of potential investment property $400,000 (plus purchase costs of $20,000)
- The bank can loan you 80% of market value which is $320,000
- 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.
The equity in your current home
Short of having $100,000 cash lying around, you’ll likely need to figure out how to use the equity you have in your current home to cover the additional $100,000 required to purchase the new investment property. That’s where equity can help.
Let’s say the current market value of your existing home $500,000, but you still owe $300,000 against it. The difference of $200,000 is your home equity.
Lenders will usually only allow you to use up to 80% of the equity in your current home, which in this case is $160,000. This more than covers the $100,000 you need to complete the investment property purchase.
Keep in mind
You might have lots of equity in your home, but that doesn’t necessarily mean that the bank will allow you to borrow against it, even at 80%. You will need to go through the approval process for your property investment loan, just like you did with your current home loan. The lender will take into account your income, expenses, credit cards and a whole range of other factors before they approve you to borrow against the equity in your home.
A Mortgage Choice broker in Sydney can help
Rupav Kwatra, Mortgage Choice broker has hundreds of great investment loans available to you, from our panel of over 20 lenders – including the big banks. We’ll sit down with you to figure out how much equity you have available to use for purchasing additional properties and put together an application for it.
We’ve helped hundreds of property investors build their investment portfolios. Let us help you too!
Call Rupav Kwatra, Mortgage Choice broker today to chat on0432 432 564.
