Property investors are jumping back into the market, with recent Australian Bureau of Statistics data showing new investor loan commitments rose 3.7% over March from February to $8.0 billion.
You don’t have to look far to see what’s driving the comeback, given the mismatch between rental supply and demand has seen rents soar 10.1% over the year to April – the fastest annual pace on record, according to CoreLogic.
But while investing in property can be a great way to build wealth and secure your financial future, saving for a deposit can be a challenging task.
Fortunately, if you already own a home, you might be able to skip this step by tapping into your equity.
Equity is the difference between the current value of your home and the outstanding amount you owe on your mortgage. For example, if your home is currently worth $800,000, and you owe $400,000 on your mortgage, your equity would be $400,000.
You can borrow against this equity and use the funds towards a deposit.
However, as a general rule, you won’t be able to access all of it as many lenders want you to have some skin in the game. As a result, you can typically borrow up to 80% of the value of your home – less the debt you still owe against it. This is known as your ‘useable equity’.
How can you access equity?
There are a few ways to access this equity.
This may require refinancing your existing home loan to maximise your borrowing power. Then a second loan split for the equity required for your investment property purchase. The second split is to allow easy accounting for any potential tax benefits you may receive for the investment property purchase.
Another option is to take out a line of credit loan. This lets you borrow and repay money, up to a pre-defined limit based on your useable equity. While you only be charged interest on the money you’ve borrowed, it will generally be at a higher rate than a traditional investment loan.
Three things to consider before borrowing against equity
Using the equity in your home to buy an investment property can be a smart move, but it’s not without risk. That’s because, if you subsequently default on the loan, you might end up losing both your investment property and your primary residence.
As such, if you do start defaulting on your investment loan, it’s usually a good idea to sell the property as soon as possible to avoid any issues with your home loan debt.
Prevention is normally better than cure, so always do your research and crunch the numbers before you commit. With that in mind, here are three things to consider:
1. Can you afford the repayments?
Buying an investment property means taking on another mortgage, which will increase your monthly repayments. You need to make sure you can afford the repayments on both mortgages, as well as any other expenses associated with owning an investment property, such as maintenance and property management fees.
As such it’s a good idea to set aside a cash buffer to cover any unexpected expenses. Additionally, if you do run into cash flow problems, you can switch your investment loan repayments from principal and interest to interest only. This will give you some financial breathing room and means you can continue to pay down your home loan.
2. What are the potential returns?
You should do your research to determine the potential rental income and capital growth of the investment property you’re considering. Look at comparable properties in the area to get an idea of what rent you could charge, and consider the potential for growth in the property’s value over time.
If you’re looking for an investment property, but don’t have time to do research, an experienced buyer’s agent can help you find quality properties with a lot of potential for return.
3. What are the risks?
Investing in property always involves some risk, such as changes in the property market or unexpected maintenance costs. You should consider the risks carefully and make sure you’re comfortable with the level of risk involved.
That said, a good landlord insurance policy can help protect you financially should the worst happen.
How a mortgage broker can help
If you’re considering using equity from your home to buy an investment property, it’s generally a good idea to speak to an expert mortgage broker, such as Just Imagine Finance.
They can provide you with tailored advice and help you find competitive loans that meet your needs, before guiding you through the application process.
Looking to buy an investment property? Just Imagine Finance can help. To discuss your scenario, contact us on firstname.lastname@example.org or 0414 673 359.