How to use home equity to finance an investment property

If you want to invest in property, you can realise your property investment goals sooner by using the equity in your home.

Investing in property is something that appeals to many Australians. Despite what many think, property investing isn’t just for the wealthy. With the right finance, planning and strategy an investment property may be easier to achieve than you think.

Use your equity as a deposit

It probably took you years to save the deposit on your own home and you think you need to do the same for an investment property. That’s not necessarily the case.

You typically need 20% of the property value to purchase a property, which can be an issue for some, but existing home owners may be able to unlock the equity in their home to make it possible.

Here is an example:

  • Sam and Jess bought their four bedroom family home in Croydon in 2008 for $365,000 putting down a $73,000 deposit and taking out a loan for $292,000.
  • Recently they decided they want to invest in the property market so they contacted their mortgage broker to discuss finance.
  • They got a valuation of their home, at the suggestion of their broker and discovered their home was now estimated at $680,000.
  • Over the years Sam and Jess had paid $70,000 off their original loan leaving $222,000 owing on the property.
  • Today’s valuation of the property, less the outstanding loan, left them with $458,000 worth of equity.
  • Their broker suggested they consider refinancing their own home to the loan ratio of 50 per cent to free up some equity for an investment. Based on the current property value and assuming they could afford the repayments, they would have $340,000 available for investing.
  • This strategy appealed to Sam and Jess because otherwise they would have needed to liquidate other assets for the deposit and this was not a viable option.
  • They decided to put down a 20 per cent deposit on a $350,000 two bedroom apartment and take out an 80 per cent loan.
  • The deposit came to $70,000 leaving ample funds for stamp duty and other property related expenses as well as equity left over.

This does mean they have a bigger loan on their home and their repayments had gone up, but they were pleased to discover the repayment on their investment property was almost covered by the $385 weekly rental income the investment property was generating.

The couple managed their investment themselves so they reduced the overheads against the gross rent. By taking out an interest-only loan they also minimised their monthly outgoings and improved their cash flow.

Getting into property investing could be easier than you think! Talk to a broker to discuss your home loan options.

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