Buying an investment property with equity

Have you owned your own home for a number of years? Have you been paying down your mortgage? If the answer is yes, then you would probably have been building up your equity, something you can use to your advantage in a significant way.  

Many people don’t realise they’re already successful property investors, having purchased their family home and watched the value increase in recent years.  Their hard work paying the mortgage means they’re already in a fantastic position to purchase an investment property.

FACT: It is a common misconception that you need a cash deposit for your investment property.

With some knowledge, most property owners can take that next step in their property journey and use their equity for a deposit for their investment property – it’s easier than you may think!

The basics - what is equity?

When the words ‘secret weapon’ or ‘golden ticket’ get thrown around when describing equity, you know the term is worth understanding!

Equity is the difference between the current value or market value of your property and the amount you owe on your home loan. In other words, it’s how much of your home you actually ‘own’.  You build up equity as you pay down your mortgage or if your house value rises - through improvements or market changes. In most cases, this happens simultaneously. 

Number crunching

So, you’ve established you have gained equity in the home you live in. But just how much equity do you have?  Take the current market value of your home (what it’s worth) and deduct the amount of mortgage you currently have owning on it.  For example, if your house is worth $500,000 and you still owe $200,000 on your mortgage, you’ll have $300,000 in equity. Generally, you will not be able to take out 100% of your equity. Most lenders limit borrowers to 80%.

Now what, how do I use my equity?

Property investment is one of the very few ways in which you can use the bank’s money to leverage or “borrow against”, in order to access more funds for a deposit (or other reasons), by using the equity built on your own property.

Whether or not the bank will lend to you depends on a number of personal factors. These will include the value of your home and your income or the regular repayments they believe you can afford.

Details the lender will want to know include:

• the market value of your property
• exactly how much you still owe
• the market value of your investment property 
• how much you want to buy it for
• your ability to service multiple mortgages
• your outgoings and ability to service the new mortgage amount
• any potential rental income on the additional property.

Lending criteria, rules and conditions fluctuate often so a meeting with a mortgage broker or lending manager is a good idea.

It’s super important to gain knowledge and seek advice to help you in the process to buying an investment property tailored for your own personal situation. Getting to understand equity is integral to this! If you’re after help or advice, get in touch with one of our team at Staircase today – we’d love to have a chat.