Investing in real estate can be a profitable venture, and leveraging equity is an effective way to finance the purchase of an investment property. By understanding how equity works and utilising it wisely, you can maximise your potential returns. This blog post provides a comprehensive guide on how to use equity to buy an investment property.
Equity refers to the ownership interest in your property, which is the difference between its market value and the outstanding mortgage amount. It can be used as collateral for loans, securing an equity line of credit, or even influencing the sale of your home. By paying down your mortgage and making smart home improvements, you can increase your equity and maximise the value of your property.
There are two key terms to distinguish when discussing equity: equity and usable equity. Usable equity is the portion of your home’s equity that you can access without selling the property. It is determined by subtracting the amount you owe on your mortgage from 80% of your property’s current value. Usable equity can be used for various purposes such as home renovations, debt consolidation, or as a down payment on another property. However, careful financial planning and consideration should precede borrowing against your usable equity.
Equity plays a vital role when purchasing a second home. It can reduce the upfront payment required, making it an appealing option for those without substantial savings. To calculate your equity and usable equity, subtract the loan balance from the total value of your home. Banks generally lend up to 80% of the home’s value minus the amount owed, which determines your usable equity. This usable equity can then be used as a deposit for an investment property.
To access your equity, you can refinance your current home loan or apply for a loan increase. The bank considers factors such as income, debts, and property value when deciding whether to grant access to your equity. By using the equity as a deposit, you can secure a new loan for the investment property. Following the “Rule of Four,” multiplying your usable equity by four can help determine the maximum purchase price for the investment property, enabling you to avoid lenders mortgage insurance (LMI) and cover additional expenses.
Equity can be used for various purposes, including home renovations, debt consolidation, and funding education expenses or unexpected medical bills. Equity loans and lines of credit often offer flexible and affordable options with lower interest rates than other forms of credit. It’s important to research and understand how to leverage equity effectively to achieve your goals and improve your financial position.
Before accessing equity for property investment, consider factors such as your current financial situation, potential risks and rewards, savings for unexpected costs, and tax implications. It’s crucial to consult with professionals and compare financing options to make an informed decision.
By utilising equity wisely and making informed decisions, you can unlock the potential of your property and achieve your investment goals. Conduct thorough research, seek professional advice, and ensure you have a solid plan in place to maximise your financial opportunities in property investment.