Accessing your home’s equity to purchase an investment property

If you’ve owned your home for a few years, there’s a good chance you've
built up some equity in your property. You may be able to borrow against
this equity to buy an investment property.
Equity is the difference between the value of your property and the amount you still owe
on your home loan. Home equity can be a valuable resource when it comes to growing
your wealth.
While there are many ways you can use the equity in your home – such as renovating or
paying for a holiday – one of the most common uses is to purchase an investment
property. The process might be simpler than you think.
Here are five steps for unlocking equity to buy an investment property.
Step 1: Estimate how much your property is worth
If you’ve owned your home for a while, its market value has most likely increased since
you bought it. You can use comparable sales in your area, a real estate agent valuation
or a free PropTrack property report from your Mortgage Choice broker to come up with
an estimate for the current market value for your property.
Step 2: Calculate your accessible equity
Once you’ve worked out how much your home is worth, subtract the current balance of
your mortgage. The difference between these two figures is the amount of equity you
have.
For example, if you estimate that your property is currently worth $1.1 million and the
balance of your mortgage is $400,000, then you have $700,000 equity in your property.
However, your accessible equity will likely be less than this. When looking to purchase a
property using equity, lenders will generally allow you to borrow up to 80% of your
property's value. This typically means you can’t access your entire equity amount.
While it may be possible in some circumstances to go above the 80% mark, keep in
mind that you will likely be charged Lender's Mortgage Insurance (LMI), even if you paid
LMI when you took out your original mortgage.
For example, 80% of the estimated market value of $1.1 million is $880,000. After we
minus the $400,000 mortgage balance, it amounts to $480,000 in accessible equity. This
is the maximum amount of equity you can use towards purchasing an investment
property without being charged LMI.
Step 3: Work out your servicing capability
Even if you’ve built up a large amount of accessible equity in your property, it’s
important to consider your ability to repay a higher amount of debt. If you refinance
your mortgage so you can use some of the equity in your property, your monthly
repayment amount will increase. Make sure you can comfortably meet these repayments
as well as your living costs.
Mortgage Choice Gary Pretty can help you determine how much money
you need to achieve your goals and whether it will be possible to meet the higher
repayment amount based on your current income.
Step 4: Review your loan options and refinancing costs
Once you’ve determined that you can comfortably service a higher mortgage on your
home, as well as an investment loan, it’s time to explore your loan options.
An important factor to consider is that while the interest rate on an investment loan will
generally be higher than an owner-occupied loan, you can claim the mortgage interest
for your investment property as a tax deduction. You may also be able to claim
management costs like property agent and strata fees, land tax and maintenance costs.
You can’t do this for a home that you live in, which is why the loan on your home will
usually cost you much more on an ongoing basis than the loan on your investment
property. Reach out to your accountant for more information on claim eligibility.
Taking this into account, Mortgage Choice Gary Pretty can help you work
out the optimal amount of equity to draw from your current home, with the remaining
purchase amount as an investment loan.
This may also be an opportunity to assess your current home loan to see if you can find
a product with a lower interest rate or better features. Your mortgage broker can also
take you through any fees and costs associated with refinancing. For example, if you
decide to switch to another lender there may be fees associated with breaking from a
fixed rate product, a new loan application fee or government fees.
Step 5: Loan application and settlement
Once you've chosen your loan options and found the right investment property, Mortgage
Choice Gary Pretty will work with you to get the application process
underway. From doing all the research, submitting the paperwork and negotiating with
lenders on your behalf, they’ll support you at every step to settlement and beyond, as
you build your property investment portfolio.
Get in touch if you’re considering accessing your home’s equity to purchase an investment property,
please get in touch with Mortgage Choice Gary Pretty on 0459 313 474
or gary.pretty@mortgagechoice.com.au. We’d love to discuss your options and answer any questions you may have.