A good way to start on your property investment journey is to access the equity in your current home. Equity is the difference between the value of your home and how much you owe on it. So, if your home is worth $600,000 and you still owe $380,000, your equity is $220,000. This is a crucial concept in property investment.
The great thing about equity is that you can use it as security with the bank and borrow against it to do things like renovate your home, start a business, buy a car or go on a holiday. More importantly, you can use the equity in your home to buy an investment property.
Keep in mind you cannot use all your available equity. Banks will typically lend you 80% of the value of your home, less the debt you still owe on it. This is your useable equity. However, it is possible to borrow more than 80% if you pay Lenders Mortgage Insurance (LMI).
So how much can you borrow? Let’s crunch the numbers for our example above. Your home is valued at $600,000 and your mortgage is $380,000:
- Value of your property $600,000
- Bank lends @ 80% $480,000
- Minus your existing mortgage $380,000
- Useable equity $100,000
What can you afford with $100,000? You could buy an investment property worth $400,000.
Here’s how it might work:
The bank will lend against your future property just as they would against your existing home. At 80%, your loan amount is $320,000, leaving $80,000 required for your deposit. Add your purchase costs such as stamp duty, legal fees and so on being about $20,000. Therefore, the total amount of funds required to purchase a $400,000 investment property is $100,000 — an $80,000 deposit plus $20,000 costs.
Using equity to buy an investment property means you may not need to save for a deposit (above example) OR you can boost deposit savings to afford a bigger investment. By having a larger deposit, you will also save money on Lenders Mortgage Insurance.
Property investment is a great way to create wealth for your future and your retirement. However, there is much more to consider when buying an investment property. Your full financial situation will need to be assessed to see if property investment is right for you.
Speak to an investment savvy mortgage broker today to learn more about accessing your equity.
For more information contact Your Future First on 03 9362 1458 or email andy@yourfuturefirst.com.au
*Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.