Using equity to buy an investment property is something many first homeowners think about. In this article, we show you how to use equity to buy an investment property and if it might be right for you.
Using equity to buy investment property
Your equity in your current home can be used to buy an investment property if you have enough to satisfy lender requirements. The total equity in your home is the amount you actually own. For instance, if your home is valued at $750,000 and you owe $350,000 on your mortgage, that means your equity amount is $400,000. Most lenders will then lend a percentage of that equity to you, which you can put towards buying another property.
How much equity do I need?
Using equity to buy another house is possible if you have enough of a “usable equity” buffer. Generally, lenders are happy to lend up to 80% of a home’s value (that includes your current debt as well) without requiring lenders mortgage insurance (LMI). This means your usable equity is 80% of your home value, minus any existing debt.
With the numbers we used above, your usable equity would look like this:
$750,000 (home value) * 80% = $600,000 – $350,000 (current mortgage) = $250,000 (usable equity).
For most lenders, this scenario would give you $250,000 to borrow using equity to buy a second property. Importantly, if a lender does not require the full 20% buffer then you could potentially borrow even more.
How much can I borrow using the equity in my home?
Similarly to when you bought your first home, a lender will most likely lend you up to 80% of your investment property’s value with a home loan. They may loan you more with LMI.
Once you know how much usable equity you have in your current home, you can work out roughly how much you could borrow to secure an investment property. You can do this by multiplying your usable equity by 5.
Let’s look at some more numbers. Again using the example above, this means 5 x $250,000 (usable equity), or $1,250,000, could be your limit for borrowing. Using equity as a deposit in this scenario means with your usable equity of $250,000, you have a 20% deposit to find a home worth more than $1 million.
Your capacity to buy a $1 million property also needs to factor in costs of stamp duty, legal fees and other upfront costs, as well as your ability to make repayments. It is important to speak to an experienced mortgage broker who can assist you in understanding your personal financial situation.
Using equity property to build a real estate portfolio
Just as you have built up equity in your existing owner-occupied property, if you have a principal and interest home loan on your investment property, you will start building equity in it too. Property values rising on both homes will also increase your equity. As you build usable equity across your two properties, you can draw on it to purchase more property if that is your goal.
Property wealth is impacted by market prices because that determines your home’s value (and therefore, usable equity). So, as markets rise, your property wealth grows, and each time it falls, your property wealth shrinks. If you are strategic with your real estate portfolio, you can use it to your advantage for long term wealth goals.
Whatever your financial and property goals, speaking to an experienced mortgage broker should be your first step to understanding what is possible when using equity to buy investment property.
Talk to us today and learn what is possible for your property goals! We are experts in investment property mortgages and finances – we will guide you through the process of using this strategy to buy an investment property.