Using home equity to fund an investment property.
Following last year’s record home value rises, many homeowners could be sitting on pots of gold when it comes to the amount of home equity—that is to say, the difference between a property’s value and how much is owed on the mortgage—they could access.
Equity which, as Belle Property agents explain in this blog, could be put to good use by homeowners considering purchasing an investment property as one of their financial goals.
How to access equity
Calculate available equity – work out the amount of equity available in your property using the estimated market value of your home minus the balance of any loans for property. For example, if your home is worth $800,000 and you owe $450,000, your equity is $350,000. The estimated market value of your home can be determined by comparing recent nearby sales on domain.com.au or by getting a property appraisal. Your local Belle Property office can provide you with a free estimate – get in touch.
Calculate useable equity – lenders will typically offer 80 per cent of the value of your home – less the debt you still owe against it. This is considered your useable equity. For example, 80 per cent of $800,000 (property value) equals $640,000, minus $450,000 (owing on loan) equals $190,000. You may be able to use this $190,000 as a deposit for an equity loan.
Review loan options – start researching and assessing your home loan options. Do a health check on your current loan, comparing interest rates, fees and features with other lenders. A home equity loan allows homeowners to borrow money against their home equity via several options, including a line of credit, a redraw facility on a variable rate mortgage, or by refinancing a mortgage.
Suppose you have owned your own home for a significant period (at least a few years) and have been consistently paying your mortgage on time. In that case, your lender may offer you the opportunity to refinance your loan at a lower rate. Check with your lender to discuss your options.
Calculate costs for accessing equity – the option you choose and the amount of equity you access may result in fees and expenses. Keep in mind Lender’s Morgage Insurance (LMI), and remember that there may be associated fees if you decide to switch lenders. If the usable equity is not enough to cover the entire deposit, stamp duty and settlement costs, you will have to make a cash contribution.
How to build equity
Reduce your debt – building equity is about increasing the gap between what you owe and the value of your home. It is crucial to keep an eye on the property market to ensure that your property’s value keeps increasing rather than decreasing as you pay off your loan.
Hold onto your property for longer – equity tends to build over time, as you continue paying off your loan and as your property value increases. Although the current rate of property price growth may be slowing in some areas following last year’s record highs, generally speaking, there are usually equity gains to be made with each passing year of homeownership.
Increase the value of your home – undertaking renovations could boost the value of your home and therefore increase your equity. If you would like advice on how you can improve the value of your home, speak to your local Belle Property agent.
Things to consider
Loan requirements – even if you have significant equity, it is not always guaranteed that you can borrow against it. Much like applying for a home loan, lenders will also consider several factors such as income, age, dependents, and any additional debts.
Cross-collateralisation – the property from which you are taking equity will become additional security for your new loan. This means any decisions you make to one loan or property may impact the other.
Professional support – before you decide to use your home equity to fund an investment property, talk to a professional. A financial adviser will assess your assets, debts and ability to fulfil loan obligations.
Achieve your property goals sooner, find a Belle Property agent near you.
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