Investing in property is a great way to grow wealth, and the next step for a lot of homeowners. As a property owner, you may have equity in your property that could be used as the deposit for a new purchase. In this article we explore how you could potentially unlock this equity.
The Definition of Equity
Equity in a property relates to the difference between the value of your property and what debt is remaining on your property. Equity can increase in scenarios where the value of your property increases, or you principally reduce your debt.
For example: If your house is valued at $600,000 and you have $350,000 left to pay on it, you have $250,000 in equity.
Whilst you may have a lot of equity built up, lenders will still review other criteria before allowing you to use the equity for the deposit. Factors that the lender will review include employment status, servicing position, exit strategy, credit history and loan to value ratio (LVR).
How Much Equity Will You Need?
Lenders ideally like to see enough equity to cover the 20% deposit plus any associated purchasing costs involved with the transaction (i.e., stamp duties, legal fees, etc). In some instances, lenders may allow you to apply when having less than 20% deposit, so long as Lenders Mortgage Insurance (LMI) is taken out, to protect the bank.
How Do You Get Your Equity?
You need to apply to get access to your equity. There are few ways you can go about this:
- Refinance. You can apply to top-up your current loan with your current lender and borrow up to a centre percentage of your property value depending on the lenders criteria, or you can refinance with someone new.
- Take out a Line of Credit. You can apply to take out a loan and use a portion of it to buy an investment and keep the rest of it for emergency use.
- Redraw Facility. If you have a variable rate loan, you may have a redraw facility attached to your loan. Most lenders will allow you to access the additional repayments you have made.
Using Equity to Buy an Investment Property in 3 Steps
How Much Do You Have?
Firstly, you need to work out how much equity you have. To work this out, you need to find out what your property is worth. There are a few ways you can do this:
- Hire an independent property valuer – this may cost you a fee of around $250
- A real estate agent can also value the property, but they may not be accurate. It is important to know exactly how much your property is worth, so you are confident when applying for a loan
- We will do it for you! Getting your home loan through us means that you have help with EVERY aspect of applying for a loan, including valuations. We will submit a valuation on your behalf
Once you know the value of your property, calculate 80% of the value of your home minus the amount you owe the bank. For example, if your property were worth $600,000 then you would calculate 80% of this amount and subtract your existing loan balance. In this example we will assume a loan balance of $350,000.
Therefore: $600,000 x 80% = $480,000.00
Subtract Loan Balance: $480,000-$350,000. Therefore, available equity that could be used is $130,000.
Again, when working with us, we will handle all these calculations for you!
Find a Property
When you are aware of how much equity you have and you know what your borrowing capacity is, you can shop around with a more accurate idea of what you can afford. Try to look in upcoming neighbourhoods or even homes in other states!
Find your Lender
Do some research and enquiries into as many lenders as you can, including smaller banks where possible. Make sure to take into consideration the interest rate, loan structure, fees and charges and any terms and conditions.
Not sure if you could make the right choice? Let us help you! We will work tirelessly to make sure we find the lender that works for you! We will also handle the whole application process from start to finish, so you can focus on trying to find the right property!