Investment Property: Using your existing equity
There is a lot of buzz in the market at the moment around investment property, and with the LVR rules set to change officially in March, and then increase even further later in the year, there has been a flurry of investors in the market. Some regions have seen investors exceeding 30% market share.
With the new rules coming in to force, and with most banks already making changes, it might seem a little more daunting for investors to purchase their next property. With deposit requirements moving to 30% and then onto 40%, it's harder to rattle together a deposit than in recent years.
However with property prices marching upwards there is still scope to leverage equity in your existing property to help fund your investment property.
Let's take an easy example.... the property you want to purchase is valued at 1 million. With a 40% LVR, you will need a deposit of $400,000…. which is a daunting amount of cash for many.
However, what many don’t consider is that you can also leverage the value of your own property to make up that 40% required. Homeowners can borrow up to 80% of the value of the house that they live in. So if you are already living in a home worth 1 million dollars, with a $400,000 mortgage, you can borrow another $400,000 against your home, which takes you to your required LVR level for your investment property. You would then have a 1.4 million dollar mortgage across 2 million dollars worth of property. This is split up into a 1 million dollar mortgage on your investment property (100%) and $400,000 on your original home (40% mortgage).
Of course, many people also choose to throw some of their own cash in the mix. For instance, you might have $100,000 in cash, and therefore only need to borrow $300,000 against your original home.
The first thing to do, is take a look at how much equity you have available to you - both in cash and in your existing property. We can then sit down and ensure that you have the correct amount of deposit required and that your current income will be able to finance the mortgage on your desired property, as well as keeping up with your current mortgage. We also take into account the rental income that will be received through your new property.
It might also be a good idea to check out how much your existing house is worth. With house prices rising rapidly, your house may be worth more than you first thought. You can get a rough idea by using the TradeMe valuation tool. This is just a guide however, and you may be required to get an actual valuation done by a registered valuer. It’s important to note that banks will always use a figure slightly less than the true value, just to allow for any movement in the market.
Along with lending, there are other factors to consider for example, where your debt sits also has tax implications, which we can make an effective plan with you and your accountant around how best to structure things in this regard.
If you are ready to take the next step into investment property, then come and chat to us. Contact one of our Dunedin mortgage advisors today to book your free appointment.