How to use your home equity to finance an investment property

Invest in property using the equity built up in your home.

The idea of property investment is one that appeals to many Australians but is sadly often overlooked because of the misconception that it is only within the reach of the wealthy. The reality is that with the right finance, planning and strategy, an investment property may be easier to achieve than you think.

Ease the deposit burden

One of the key challenges to breaking into property investment is raising a deposit, but there are solutions. Property buyers are typically required to contribute 20 per cent of the property’s value, and for some this can be a stumbling block. But existing home owners may be able to unlock equity – or the increased value – that’s built up in their own home to cover some or even all of the down payment on an investment property. The following scenario illustrates how borrowers can capitalise on the equity in their homes to purchase an investment property.

Example: Dan and Jessica bought their four-bedroom family home in Rockhampton in 2003 for $247,000 putting down a $49,400 deposit and taking out a loan for $197,600. The couple recently decided that they’d look at breaking into the investment market so they contacted their mortgage broker to discuss finance. Their mortgage broker suggested they get a valuation of their home, and they discovered that it was now estimated at $480,000. Over the years, Dan and Jessica had paid $48,000 off their original loan leaving $149,600 owing on the property. Today’s valuation of the property, less the outstanding loan, left them with $330,400 worth of equity. Their mortgage broker suggested that 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 be able to borrow $240,000 – making an additional $90,400 available for investment purposes. This strategy appealed to Dan and Jessica because otherwise they would have needed to liquidate their managed funds to raise the deposit for the investment property and this was not a viable option as these fund balances were low due to recent poor performance. 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 a further $20,400 to cover stamp duty and other expenses while a $280,000 loan covered the rest of the purchase price. Now that Dan and Jessica had a bigger loan on their home their repayments had gone up, but they were pleased to discover that the repayment on their investment property was almost covered by the $385 weekly rental the investment property was generating. And because the couple managed their investment themselves 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.

See a summary of the example explained in paragraph above:

Current Home:

Purchase price of home (2003) $247,000
Original mortgage loan $197,600
Deposit paid $49,400
Loan to Value Ratio 80%

Updated Home Valuation:

New valuation $480,000
Current loan balance $149,600
Equity available $330,400
Loan to Value Ratio 31%
Refinance + Cash Out amount $240,000
Funds available for investment $90,400
Loan to Value Ratio 50%

Purchase of Investment Property:

Purchase price of investment property $350,000
20% deposit on property $70,000
Funds available for other costs $20,400
Investment loan amount $280,000
Loan to Value Ratio 80%
Help for first time investors through LMI

First time buyers can also crack the investment market without having to scrape together a huge deposit. Traditionally lenders would look for a 20 per cent deposit from property buyers but today it’s possible to borrow up to 95 per cent of a property’s value with the help of lenders mortgage insurance (LMI). LMI protects the lender against the risk associated with providing borrowers with a higher percentage loan in the event that they default. The cost of LMI can often be added to the overall loan amount, reducing the initial outlay.

At MoneyQuest Teneriffe we are full service finance and mortgage brokers, providing business finance, franchise lending, commercial and residential property mortgage loans, SMSF loans, and car and equipment finance.

Call us on 0417 551 445 for a no obligation appointment to discuss your specific requirements.

 

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Disclaimer:

This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the article is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).

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