Buying a home to live in can provide you with financial and emotional security for the rest of your life. And buying an investment property can help you build life-changing wealth.
What you might not realise is that acquiring your own home can give you the springboard you need to purchase an investment property.
How? By tapping into a thing called ‘equity’.
Equity is the difference between the value of your property and the mortgage outstanding on the property. For example, if your home is worth $700,000 and you still owe $400,000 on your mortgage, your equity would be $300,000 (while the lender’s would be $400,000).
Potentially, you could borrow against the equity and use that new loan as the deposit on an investment property.
How your first property can help you buy your second
To understand how, let’s continue with the hypothetical example mentioned above.
Unfortunately, you won’t be able to take out a loan equivalent to your equity (i.e. $300,000). Instead, most lenders will let you borrow up to 80% of your home’s value, minus the outstanding mortgage. That means:
- Your home’s value = $700,000
- 80% of your home’s value = $560,000
- Outstanding mortgage = $400,000
- Available equity = $160,000
So even though you have $300,000 of equity, you have only $160,000 of available equity.
Potentially, you could now take out a new loan of up to $160,000 – assuming you meet all the standard borrowing criteria, which would still apply.
If you put down a deposit of 20% on an investment property, you could buy an investment property worth up to $667,000 (once you accounted for transaction costs such as stamp duty and conveyancing fees). Potentially, some lenders might let you put down a deposit of as little as 10% or even 5%, provided you paid lender’s mortgage insurance. In that case, you could buy a more expensive property. Either way, the standard borrowing criteria would apply – so the lender would have to be convinced you had the capacity to pay both your new investment loan and original owner-occupied loan.
Paying off a second mortgage might be easier than you think
Can you see, based on this hypothetical example, how powerful your equity can be?
Instead of spending years saving for a new deposit, you can convert your equity into cash and immediately buy an investment property, which could deliver capital growth and rental income for decades to come.
Here’s another thing that might not have occurred to you – it’s easier to make repayments on an investment mortgage than an owner-occupied mortgage.
Why? Because an investment property generates rent, which can be used to pay off your mortgage.
If you buy a positively-geared property, you’ll actually have more money in your pocket each week. That’s because the rent you collect will exceed all your expenses (such as interest repayments, property management fees, maintenance and insurance).
If you buy a negatively-geared property, your cashflow will be reduced, as the expenses of your rental property will exceed the income it generates. However, at tax time, you can possibly use that loss to reduce your taxable income. (This is general advice only: please see an accountant to get personal tax advice for your unique circumstances.)
Get expert advice so you can make an informed decision
That’s the upside of using equity from your home to buy an investment property.
Of course, there’s also a downside. Taking on more debt means taking on more risk. And if your investment property is negatively geared, it also means you’ll have less disposable income.
So this strategy isn’t suitable for everyone. That’s why it makes sense to explore your options by chatting with an experienced mortgage broker, like Just Imagine Finance.
Thinking about using equity to buy an investment property? Catherine Salat can give you the expert advice you need to make an informed decision. Contact Catherine on 0414 673 359 or email@example.com