Updated: Jan 13
Are you looking for a way to purchase your next property without taking ages saving up for the down payment? Your property can help you! Read more to find out how.
The equity in your current property is a valuable resource that can allow you to secure the funding of your next investment property. If you want to purchase your next property without taking ages saving up for the downpayment, you’re in the right place. This article will help you get started with equity release to invest in property.
Let’s start this article with the precautions. It’s essential to keep in mind that if you borrow against your property and can’t make the repayments, you may lose your home in the process. With this said, you need to ensure that you borrow within your means.
What Is Equity?
As a property investor or a homeowner, you probably heard of the word ‘equity’ thrown around by real estate experts, brokers or maybe read it in an article like this one. But what is equity? Equity refers to your property’s current market value minus the amount still owed to the bank. Here is an example to clarify:
Your property valuation is at $900,000, and you still owe $400,000 on it. Your equity is $500,000.
Keep in mind that as the market value of the property fluctuates so does the equity. It is crucial to note that even if you have equity, this doesn’t mean you can automatically access it. Your lender will look at other factors, such as your age, income, current debt, your dependents, and the property’s location. Best to approach a qualified mortgage broker for the help.
Note that the total owing needs to conform to the LVR (Loan To Value) ratio of the property.
In this above example, assuming 80% LVR, available equity will be 80% of $900,000 minus $400,000 = $320,000.
How To Use Your Equity In Purchasing New Properties?
Now, when you know how much equity you have access to, the next begging question is what you can do with that.
You can compare investing in property to planting. Your investment properties are the seeds that you plant and watch them grow. However, if you want to harvest your profits sooner and speed up its growth, you must be willing to invest in fertilisers or property investing. So in this context, leveraging this opportunity to build more equity by buying another property is a viable option. The equity in your existing property will serve as the required deposit for your next purchase, effectively making it a 100% borrowing without needing any LMI (Lender’s Mortgage Insurance).
Make sure that you do not cross-collateralise your assets.
Questions To Ask Yourself Before Using Your Equity
Before proceeding to use equity, consider the following questions first:
How much will your loan repayment rise by?
Will you need a longer loan term?
Do you have a budget in place to accommodate the additional costs?
Can you access your property equity through your current lender or will you need to refinance?
Are you prepared for the possibility of increasing interest rates?
If you do change lender, are you prepared to pay break costs, application costs-- establishment, legal and valuation fees, stamp duty and possibly LMI?
Again, a qualified mortgage broker will be able to guide you on that.
Maximise your equity by renovating and developing your investment property. For example, you can remodel your kitchen, bathroom, rooms or re-carpet and repaint the property. Make sure that you do not overcapitalise.
Assess your risk every time you consider increasing your liabilities. Be as practical as possible so you can know whether the property can generate rental income or increase in value over time. Remember to have an investment strategy that looks for current and future benefits.
Using your property equity to fund your new property investment is one of the best strategies to build your portfolio. However, make sure that the properties you choose are the right ones matching your aspirations and are in accordance to your long term investment strategy. Don’t waste your money, time, and effort in properties that might overly risk your financial state without adequately rewarding you. Nevertheless, make sure to have a risk management plan in place. Always prepare for the rain and unexpected storms. You never know.
If you want to ensure your success, the right thing to do is to consult with a professional.
Where Do You Go From Here?
Are you planning to use your equity to help you achieve your property investment goals? As a seasoned property investor, I know the intricacies and complexities that come with investing in properties. I will work with you to simplify this process, make it as rewarding and stress-free as much as possible and ensure your property investment’s success.
Next steps: Should you want to learn how the author built his $5m balanced portfolio in 7 years, and aspire to own something similar, feel free to get in touch via email at firstname.lastname@example.org or book an appointment here.
Disclaimer: This article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a financial adviser.