Using Equity to Buy an Investment Property: How Home Owners Can Purchase Without Saving a Deposit
If you’re a budding investor or currently have a solid investment portfolio, you may already know that using equity to buy an investment property is something you can do.
While some property owners are aware of this, others may be under the assumption that they need to save a deposit again.
If you’re looking to enter the investment property field or want to build on your existing portfolio, we’ve put together some tips on using equity to buy an investment property.
What is equity?
Equity is the difference between the current value of your home and how much you still owe.
For example, if your home is worth $500,000 and you still owe $300,000, your equity is $200,000.
However, while you can use equity to make numerous ‘big’ purchases, not all of your equity is useable.
As the name suggests, your total equity is the total amount of equity you have in your property.
Using the above example, the total equity would be $200,000.
Your useable equity is the amount of equity you can access, which is lower than your total home equity.
This is generally equivalent to 80 per cent of your property’s value minus the remaining balance on your mortgage.
Going back to the above example, with a property worth $500,000, the useable equity in this scenario is $100,000.
You can increase your useable equity by paying off more of your debt.
Using equity to buy an investment property
Once you know how much useable equity you have in your home, you may be able to use this equity to purchase an investment property.
Leveraging your useable equity to buy an investment property is a great way to build wealth.
There are several methods to borrow against the equity in your home to buy another property which we have outlined below.
Home loan top-up or increase
A home loan top-up is one of the most common ways to borrow against the equity in your property.
This involves getting your lender to increase your existing home loan limit to give you the funds (rather than saving for a cash deposit).
A top-up of funds is deposited into your account as cash, where you can then use the funds to secure your investment property.
Supplementary loan account
Some property owners might not want to increase their current home loan balance.
There are options for those who don’t want to do this.
Instead, you can set up a new supplementary loan account which may allow you to choose different features from those on your current home loan. E.g., new repayment frequencies, type of interest rate etc.
If you choose to access your equity with a separate loan, you might decide upon a loan with a different loan term.
However, remember that your new loan could have a longer term than your existing one and might extend the number of years over which you pay interest on the entire loan.
To learn more, read our blog on using one lender for all of your loans.
Cross-collateralisation allows investors to leverage the equity in their property by using an asset that’s collateral for an initial loan as collateral for a second loan.
This means if you’re unable to make your scheduled repayments for either loan, the affected lenders can eventually force the liquidation of the asset and use the proceeds for repayment.
If you have multiple properties securing a loan, you might be able to increase the loan and access the equity generated if one or more of these properties have increased in value.
To learn more, read our blog on cross-securitisation vs stand-alone securitisation.
Tips for using equity to invest
Borrowing against the equity in your property is a great way for investors to build or start their investment portfolios.
Here are some common questions that arise from investors.
Time frame and amount of equity
This is one of the most common questions and does vary between lenders.
Generally, banks are happy to lend you 80 per cent of the value of your home (minus the debt that you still owe against it).
An example of determining your usable equity can be found below.
Imagine that your home is valued at $400,000 and your mortgage is $220,000. This would mean that:
- The value of your property is $400,000
- The value of your property at 80 per cent is $320,000
- Minus your current mortgage of $220,000
- Your useable equity is $100,000
Your equity tends to build over time as you continue paying off your loan and the value of your property increases.
However, some ways to build equity are to purchase property in a suburb with an increasing property value.
Also, refinancing to a shorter loan term, cheaper rate (or both), making additional repayments, increasing the value of your property through renovations and home improvements and seeking multiple bank valuations can all help build equity.
Getting your property valued
Property valuation is the estimated value of your property, as tested by an independent or bank-approved appraiser.
This certified appraiser considers the home’s value for a longer term.
It’s usually more conservative and is used by financial institutions to assess the property’s value to calculate how much more money they can lend you.
Some things property valuers look for include:
- Size and shape of your property
- Topography (geographic features) of land
- Potential for development
- Number of rooms
When getting your property valued, always seek out a few different opinions, as what one person may value it at can vary from another.
Seeking different opinions across multiple banks means you may be able to get your property valued higher resulting in more usable equity which could be the difference between purchasing that next investment property or not!
Working with an experienced mortgage broker to seek out these different opinions on your behalf ensuring that you have the maximum equity available to use.
For new and experienced property investors, saving enough money for a deposit on another property is often out of the question.
Fortunately, using equity to buy an investment property is an option for homeowners.
The Inovayt wealth team offer experience and guidance for those looking to build their investment portfolio.
If you’re wondering how you can borrow against the equity in your home to purchase an investment property, get in touch with our expert team today.