February 26, 2013
Often, people who have paid off all or part of their home borrow against the equity they have built up over time - the difference between a home's market value and the unpaid balance of the home loan - to finance the deposit for an investment property purchase. It tends to be an ‘old school’ notion that repaying a home loan in full is a must-do before purchasing more properties.
Of course, how much you can borrow is subject to lenders’ serviceability criteria as well as the amount of available equity, which works as security for the investment loan. This means you don’t have to come up with a cash deposit. Keep in mind if you intend to borrow more than 80% of the total property value, ie. that of your home plus the investment property, you will probably be required to pay lenders mortgage insurance, which can be quite costly.
It is important to note this strategy does require borrowers to take on a certain amount of risk. Before accessing your equity it is necessary to establish whether you can comfortably afford higher loan repayments and which, if any, lender is willing to lend to you. So, it’s clever to consult a financial and tax adviser then visit a reputable mortgage broker, who can help you compare finance options and find a lender and loan product suited to your circumstances.
I have identified three common types of equity finance available:
- Loan top-up - allows a borrower to increase their home loan amount in order to help fund another property purchase. Extra funds are usually made available via a lump sum payment with interest payable on the entire top-up amount.
- Line of Credit - allows a borrower to withdraw funds in addition to their home loan amount, up to a limit set by their lender. Interest is also payable on these funds. Line of credit loans generally attract a higher interest rate, are often interest-only and must be carefully managed.
- Refinancing - allows a borrower to move to a different lender and loan product in order to increase their home loan amount. It’s important to shop around as lenders offer different features, fees, interest rates and measure borrowing capacity differently.
For more information contact Richard Windeyer on 1800 01 LOAN or click here to "Book a Meeting"