How to Use Equity to Buy an Investment Property

Understanding Equity

Equity is the difference between what your property is worth and what you owe on your mortgage. As property values rise, so does your equity, which can be a valuable asset when considering investment opportunities. In Australia, many homeowners leverage this equity to purchase investment properties, providing a potential pathway to wealth creation.

How to Calculate Your Equity

To determine your equity, follow these steps:

1. Market Value of Your Home: Obtain a property valuation or use online tools to estimate your home's current market value.

2. Outstanding Mortgage Balance: Check your latest mortgage statement to find out how much you still owe.

3. Equity Calculation: Subtract your outstanding mortgage balance from your home’s market value.

For example:

• Market Value: $800,000
• Outstanding Mortgage: $500,000
• Equity: $800,000 - $500,000 = $300,000

How to Use Equity as a Deposit for an Investment Property

Once you have determined your equity, you can use a portion of it to finance the purchase of an investment property. Here’s how to go about it:

1. Assess Your Borrowing Capacity

Before moving forward, it is crucial to assess your borrowing capacity. Lenders typically allow you to borrow up to 80% of your property's equity without requiring lenders mortgage insurance (LMI). If you wish to borrow more, LMI may be applicable.

• **80% of Available Equity**: If your equity is $300,000, you may be able to access $240,000 (80% of $300,000) for your investment property deposit.

2. Speak with a Mortgage Broker

Consulting with a mortgage broker, like Timothy Yang at Northmark Finance, can help you navigate the complex mortgage landscape. A broker can provide insights into:

• Different loan products available for investment properties.
• Current interest rates and lender policies.
• The impact of your existing debts on your borrowing capacity.

3. Determine Your Investment Strategy

Understanding your investment strategy is essential, as it influences the type of property you will purchase. Consider the following:

• **Capital Growth**: Are you looking for properties in areas with high potential for value increase?
• **Rental Yield**: Do you want properties that will generate a steady rental income?

4. Shop Around for the Right Loan

Once you know your borrowing capacity and investment strategy, it’s time to look for a suitable loan. Key factors to consider include:

• **Interest Rates**: Compare fixed vs. variable rates.
• **Loan Features**: Look for features such as offset accounts or redraw facilities.
• **Fees**: Be aware of upfront fees, ongoing fees, and exit fees.

The Process of Accessing Equity

1. Apply for a Home Equity Loan or Line of Credit

Once you have selected a lender, the next step is to apply for a home equity loan or a line of credit. This involves:

• Submitting documentation, including proof of income, expenses, and existing mortgage details.
• Undergoing a property valuation to confirm your home’s market value.

2. Use Funds for Investment Property Purchase

Once approved, you can use the funds to purchase your investment property. Ensure you have a clear understanding of:

• **Investment Property Costs**: Aside from the deposit, consider additional costs such as stamp duty, legal fees, and inspection costs.
• **Ongoing Expenses**: Factor in costs like property management fees, maintenance, and insurance.

FAQs

Can I use equity if I have a small amount of savings?

Yes, you can still utilise your equity even if you have limited savings. Many lenders assess equity as a viable source for your deposit, allowing you to enter the property market sooner. However, ensure you are comfortable with the associated risks and ongoing costs.

Conclusion

Leveraging equity to buy an investment property can be a smart financial move, but it requires careful planning and understanding of your financial situation. As the Australian property market continues to evolve, seeking personalised advice from a qualified mortgage broker can help you navigate the complexities involved.

For tailored guidance and support in your investment journey, reach out to Timothy Yang at Northmark Finance. With his expertise, you can make informed decisions that align with your financial goals.

*Disclaimer: This article is general information only and does not constitute financial advice. Always consult a qualified professional for personalised advice.*