Rising property prices and high interest rates can make buying an investment property seem out of reach.
That’s because lenders generally need you to have a 20% deposit if you want to avoid paying lender’s mortgage insurance.
Just saving for this deposit requires careful planning and takes longer now than ever before due to soaring home values. In fact, according to Domain, it can take four years and nine months to save a 20% deposit for an average home in Australia.
There are also other costs involved with buying an investment property, such as stamp duty. In some locations, this is now almost six times more than a generation ago, according to PropTrack.
Also, you might want to undertake some renovations on the home to get it ready for tenants.
But did you know, as an existing homeowner, you could access the equity in your existing home to put towards an investment property?
What is equity?
Equity is the difference between your property’s market value and your outstanding mortgage balance. So, let’s say your property is valued at $700,000 and you still owe $300,000 on your mortgage, your equity would be $400,000.
However, not all of this equity is considered “useable” by lenders.
What is usable equity?
Usable equity is the portion of your equity that lenders will allow you to access.
Lenders generally allow you to access 80% of the property’s value less what you still owe on your mortgage. So in our example, your usable equity would be 80% of your property’s value ($560,000) minus $300,000 in existing loans, which gets you to $260,000 in usable equity.
What to consider before accessing equity
Before accessing your equity to invest in a property, there are several factors to keep in mind, including: Affordability:
- Access equity to invest in property increases your debt. It is important to ensure you can comfortably afford the repayments on both mortgages, considering potential interest rate changes and fluctuations in rental income. As such, it’s generally recommended you have a buffer to cover loan repayments and property-related expenses (like maintenance, property management fees, and vacancy periods) without stretching your finances too thin.
- Your investment strategy: Consider your investment goals and strategy. Doing your research is most important. This includes into the home itself, the area, the market in that location, the rental market and potential population changes. You should also consider your risk tolerance and long-term financial objectives.
- Cross-collateralisation: This involves using more than one property as security for a loan. While it can make accessing equity easier, it also links the debts of these properties, which can complicate selling one of the properties or refinancing in the future.