Using Equity To Buy An Investment Property

The BRW 200 Rich List which lists Australia’s wealthiest individuals, was heavily stacked with property tycoons in 2016. These billionaires all started in the same place – with a single property investment.

You may not be the next Harry Triguboff, or even aspire to be (or know who he is!), but if you own a single property it’s possible to steadily build a very healthy property portfolio by leveraging your equity in that first property purchase.

To buy an investment property via equity, you need to:

  • Have either paid down a sufficient amount of your current mortgage, or the property you own needs to have risen in value (or both), and
  • Refinance your current property

What is Your Equity?

The equity in your property is the difference between the balance of your mortgage owing and the current market value of the property.

Example: You bought property for $600,000 and borrowed $500,000. Three years later, if the property is valued at $650,000 and you have paid the mortgage down to $480,000 then your equity is $170,000.

The first step you need to do when preparing to buy an investment property is determine the value of your current property.

The lender you use will complete a valuation on your existing property, however it’s a good idea to get an estimate on the current market value yourself before going down this process. By doing this you can do the rough maths to work out if accessing equity is a feasible option for you right now.

An estimate on market value can be achieved by:

Do the Numbers

Once you have the estimated market value of your property, you will have a fair estimate of your available equity. Make sure you are conservative with your estimate, as lender valuations tend to be lower than market valuations.

Depending as always on your lender’s requirements, you may be able to access 80% of your equity to use for the deposit on your next property.

Example: If your current equity is $170,000 (as in the above scenario) then you should be able to access up to $136,000 for the deposit on an investment property. This could enable you to purchase a property valued at $680,000 based on 80% of the purchase price or $1,360,000 based on 90%*

*This is subject to other lender criteria, and having funds available for other costs including government charges.

Some lenders will lend investors up to 95% of the purchase price of a new property, however keep in mind that Lenders Mortgage Insurance will almost certainly be payable if you borrow more than 80%. This will increase your overall costs.

Buying Your Investment Property

By this stage, you will have a clear idea of whether you can go ahead with another property purchase or need to wait a bit longer for your equity to increase.

Let’s assume you are good to go!

The next steps are to speak with a mortgage broker about your needs, start preparing your loan paperwork and look for suitable properties on the market within your price range.

Meet Your Mortgage Broker

The first discussion with a mortgage broker will be to make sure all your figures and paperwork are in order.

You will be looking to refinance your existing home loan and take out a separate loan to provide the deposit for your next purchase. It’s very important not to mix up deductible and non deductible debt, hence the need for the separate loan.

Once this is completed and you have the deposit funds sitting in your bank account plus the loan for the investment property is pre-approved, it’s time for you to search for your second investment property in earnest.

Once you have found the property and negotiated a purchase price subject to finance, your broker will begin the loan process by sending the details to the lender that has given you pre-approval. All being well it should be smooth sailing from there.

If you are keen to add more properties to your investment portfolio in the future, when you have more equity available to borrow against, the whole process can be readily applied again!

Good luck setting your property portfolio in motion.

To chat to an Online Home Loans broker, call us on 1300 135 456, web chat or fill in the Contact Us form and we’ll call you back.

 

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