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If you already own a home, you might not need a deposit to buy an investment property. Instead, you may be able to harness the power of your home equity.
Your home equity is the difference between your property's market value and the balance of your mortgage. If you've owned your home for a few years, there's a good chance you've built up some reasonable equity, and this can be a valuable resource when it comes to property investment.
Your local Mortgage Choice broker can help you to find out how much equity you have in your home, and how you might be able to use it to own an investment property sooner.
Here's how it works. Let's say you want to buy an investment property with a market value of $400,000. There are also additional purchase costs (legal fees, stamp duty and so on) of $20,000, bringing the total cost to $420,000.
Assuming that you meet the loan approval requirements, a lender will fund 80% of the property’s market value - potentially more if you're prepared to pay Lenders Mortgage Insurance (LMI). That is, the bank will lend you $320,000 to buy the investment property. As the total cost of the property is $420,000 you still need an additional $100,000 for the deposit and other upfront expenses. This can come from the equity in your existing home.
Let's say the market value of your existing home is $500,000 and the balance of your mortgage is $300,000. The difference between the two is $200,000, which is your home equity.
As an investor you can access up to 80% of your home equity (without the need to take out LMI), which equates to $160,000 in this example. Instead of coming up with a cash deposit for the additional $100,000 needed to buy the investment property, you can take this from the $160,000 of accessible equity in your existing home.
The available equity in your home is calculated at 80% of your home (without the need to take out LMI) less any current loans, which equates to $400,000 less $300,000 = $100,000.
Alternatively some lenders will lend up to 95% of the property value less the existing mortgage, where LMI would be paid on the amount borrowed over 80%.
Many property investment gurus say it’s important to repay the loan on your home as soon as you can. The equity that is drawn down from your home to purchase an investment is tax effective, but any remaining debt on your home isn’t. Therefore the loan on your home costs you much more on an ongoing basis than the loan on your investment property.
The property that you live in is not the only source of home equity. You can also use the equity in an existing investment property to help fund the purchase of another investment property.
Your Mortgage Choice broker can help you to work out how much equity you have in your property and how it can be accessed to fund your investment.
This Property Investor Guide outlines the benefits of property investment as a means to build wealth and factors one must consider when planning to purchase an investment property. We explain the costs and steps associated with the purchase, positive/negative gearing as well as pros and cons of houses vs. units.
The above information is provided for general education purposes only and does not constitute specialist advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific investment advice should be obtained from a suitably qualified professional before adopting any investment strategy.