For many homeowners, the idea of saving a deposit for an investment property might feel overwhelming. However, using equity to buy property offers an effective alternative that can fast-track your entry into the investment market. If you’ve built up equity in your home, it could provide a pathway to purchasing an investment property without needing to save for years.
What Is Equity, And How Does It Work?
Equity is the difference between the current market value of your property and the amount you owe on your mortgage. Here’s an example. If your home is valued at $600,000 and your mortgage balance is $400,000, your total equity is $200,000. This figure represents your ownership stake in the property.
Understanding “how does equity work” is key to realising its potential. Not all equity is accessible. Usable equity is typically calculated at 80% of your home’s value minus what you owe. For the example above, your usable equity would be $80,000 (80% of $600,000 = $480,000, then subtract the $400,000 mortgage). This usable equity becomes the foundation for financing an investment property.
Using Equity To Buy Property
Once you’ve determined your usable equity, you can explore how to utilise it to secure an investment property. This strategy can help you expand your portfolio or take the first step as a property investor. Here are some common methods:
1. Increasing your current home loan
One way to use equity is by increasing your existing home loan. This process involves applying to your lender to extend your loan limit. The additional funds can be accessed as cash and used as a deposit for your investment property. This approach keeps everything under one loan, simplifying repayments.
2. Setting up a supplementary loan
If you’d prefer to keep your new property’s financing separate, you can establish a supplementary loan. This involves opening a new loan account specifically for your investment property. A supplementary loan may allow you to select terms and features that differ from your current home loan, such as interest-only repayments or variable rates. While this option provides flexibility, it could extend the repayment term.
3. Cross-collateralisation
Cross-collateralisation allows you to use multiple properties as security for a single loan. For instance, your existing home and new investment property can act as collateral. While this approach can increase borrowing capacity, it also comes with risks. If repayments can’t be met, both properties may be at risk. It’s essential to consult with a home loan broker to weigh the pros and cons of this strategy.
What To Consider When Using Equity
Using equity to buy property offers a range of benefits, but it’s important to approach it with careful planning. First, understand how your usable equity aligns with your investment goals. Knowing your borrowing power can help you identify properties within your budget.
Next, keep an eye on market conditions. Property values fluctuate, and equity growth depends on factors like location, demand, and economic trends. Choosing a property in an area with strong growth potential can boost your chances of success.
Finally, think about your cash flow. While equity can fund the deposit, you’ll still need to cover ongoing costs like mortgage repayments, maintenance, and property management fees. Ensuring these expenses fit within your financial plan is essential.
Getting Your Property Valued
To calculate your usable equity, you’ll need a property valuation. A professional valuation assesses your home’s market value, factoring in its location, condition, and features. Banks and lenders often rely on this valuation to determine how much equity you can access. Seeking multiple valuations from different lenders can provide a clearer picture of your property’s worth and potentially unlock more equity.
Working with a mortgage broker can simplify this process. They can negotiate with lenders on your behalf and ensure you’re accessing the maximum equity available.
Why Use Equity To Invest?
Using equity to buy property allows you to grow your investment portfolio without saving for a traditional deposit. It also helps you make the most of the financial resources you’ve already built. By leveraging the value of your home, you can invest in a property sooner, giving you the opportunity to benefit from potential capital growth and rental income.
If you’re ready to explore how equity can work for you, connect with Inovayt today. Our team of experienced brokers is here to guide you through the process, from calculating your usable equity to securing the best loan for your investment goals.
Start your journey toward property investment without the hassle of saving for a deposit.