Using Your Equity to Invest in More Property
As there is currently a lot of press about tenancy laws and the proposed changes, I thought I would encourage you to present your views through this consultation period. This month, I will explain equity and how that could be used to buy an investment property, if you choose to do that.
Equity in Property Investment
If you have taken out a mortgage on a property and have been paying it off for a while, you may have access to some equity in your home.
So, What is Equity and How Can I Use it to Buy a Property?
In simple terms, equity is the difference between the value of your property and the amount that is owed on it. For example, a home worth $1,000,000 with a mortgage of $400,000 has $600,000 in equity. However, the amount you can use as a deposit is determined by whether it is owner-occupied or a rental property. With an owner-occupied you may borrow up to 80% of the value of the home, therefore $800,000, which means, once the current mortgage is deducted there is up to $400,000 in equity available to use to secure an investment property.With an investment property with normal banks, you can borrow up to 65% of the value of the property. In the above example that would be $650,000. Therefore, the amount of available equity is $650,000 minus $400,000 = $250,000. This $400,000 or $250,000 can then be used as a guarantee to secure an investment property, with no deposit required.
Use Equity to Drive Your Wealth
Using your equity wisely to buy a rental property would allow you to build your property portfolio.For example, under normal circumstances if you want to buy a rental property you would require 35% deposit. Let’s say the rental property is worth $600,000; you would then require $210,000 deposit. That deposit is secured against the available $400,000 / $250,000 from the owner-occupied / investment property via a guarantee from the bank (assuming you qualify) and would allow for a 100% lend.
Needless-to-say, I strongly recommend you get professional advice around affordability, tax, tenancy laws and so forth from respected professionals. Once you have received advice I would be more than happy to calculate how much equity you have available and show you how you can leverage that to buy one or more rentals.
You can also email me for a simple equity calculator.
Everyone’s financial situation is different and by no means do I suggest that property guarantees wealth. You need to invest wisely and seek good advice.
As always, if you have any questions, feel free to call.