For homeowners who want to build wealth, one powerful strategy is to use the equity in your home to purchase an investment property.
Equity is the difference between the current market value of your property and the amount you owe on your mortgage. Imagine you purchased a property in Sydney for $900,000, which had since appreciated in value to $1.2 million, and that you still owed $650,000 on your mortgage. Your equity in this example would be $550,000: the property’s current value minus what is still owed on the loan.
However, your ‘useable equity’ would be different – this is the portion of that equity that you can actually access or borrow against.
What is usable equity?
Usable equity takes into account the lender’s requirement for a buffer and any restrictions on how much you can borrow. Lenders generally prefer borrowers to limit their loan-to-value ratio to 80%, with the remaining 20% considered a safety buffer.
So, in our example above, your usable equity would be $310,000 – 80% of the value of the property ($1.2 million), less the loan amount remaining.
Accessing your usable equity
By accessing your usable equity, you can finance the purchase of additional investment properties, potentially increasing both your rental income and long-term capital growth.
There are several ways you can access your usable equity:
Refinancing your existing loan
This involves taking out a new, larger loan secured against your current property. The new loan pays off your existing mortgage, and the additional funds can be used as a deposit and cover associated costs for a new investment property. This consolidates your borrowing under one loan.
Establishing a separate loan split with your existing bank
A new loan split is created alongside your existing loan/s that lets you borrow against your property’s equity. This allows you to access funds as needed to cover the deposit on your new investment property or pay for the stamp duty and other related fees.
Taking out a second mortgage
A second mortgage involves taking out a separate loan secured against the equity in your property while keeping your original mortgage intact. The funds from this second loan can then be used for your investment property purchase.
Key considerations for accessing equity to grow your property portfolio
Once you’ve established you have equity to access, you can begin the process of buying your next investment property by following these steps.
Assess your financial position
Before leveraging equity, carefully evaluate your current income, expenses and existing debts. Make sure you can comfortably service the increased loan obligations associated with a new investment.
Set your investment goals
Decide whether you are looking for a property that offers strong capital growth prospects, high rental income potential, or a bit of both. This will help determine what kind of property you should buy and in what location.
Conduct thorough market research
Depending on your investment goals, consider your next purchase’s location, vacancy rates, rental yield and price. Look at the factors that will impact demand like economic activity, population growth and infrastructure development.
Understand the risks
It’s important to remember that leveraging equity increases your overall debt. Additionally, property values can fluctuate, and interest rates can rise, impacting your repayments. It can be helpful to have contingency plans in place to manage these risks.
Get professional advice
Consult both an experienced mortgage broker and a financial adviser who specialise in property investment. They can help you understand your borrowing capacity, explore different loan structures and assess the risks involved.
Are you ready to expand your property portfolio? Whether you have a property in mind or are just getting started, Clever Finance Solutions can help you with the process. Book a call with us to discuss your home loan needs.
