How to use your home equity to buy an investment property
Investing in property is the new Australian dream - a well-chosen property should provide 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 required.
Using your home’s equity to invest
If you’ve owned your home for a while, chances are you’ve built up valuable equity. That home 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. In the past, the only way to purchase new property without a cash deposit was to sell up. Now, home loans are pretty flexible, and it is possible to make use of the 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 our team at KBRZ can help you figure out.
What is equity?
To simply put, equity is the difference between what you owe on your mortgage and what your home is currently worth. For example, if you owe $100,000 on your mortgage loan and your home is worth $200,000, you have $100,000 worth of total equity in your current home.
How to calculate your usable equity
A common misconception is that you can use all your equity to buy an investment property. In most instances, you could typically expect to borrow up to 80% of the value of your home.
With this in mind, here’s an example of how you can calculate your usable equity:
1. Calculate 80% of the value of your home: $200,000 x 80% = $160,000
2. Take the 80% value of your home and subtract your current outstanding debt: $160,000 - $100,000 = $60,000.
This means you have $60,000 worth of usable equity to put towards a deposit for an investment property, as well as other buying costs like stamp duty and settlement fees.
How KBRZ can help
Using equity is a great option to potentially lock in a better interest rate, and avoid paying Lenders’ Mortgage Insurance (LMI). If you are interested in using your home equity, or if you have any further questions, please feel free to contact us today. With our extensive network and years of experience in the industry, our team at KBRZ can provide tailored investment loan solutions that will allow you to maximise your wealth regardless of your circumstances.