Using your home equity to buy an investment property
A common question we are asked at Mortgage Broker Melbourne is “How do I use my home equity as a springboard to purchasing an investment property?”
So you purchased your home some time ago, have doggedly chipped away at the mortgage and watched the value increase in this fantastic Melbourne property market of ours. How do you turn that to your advantage to start growing a property portfolio?
Equity is the difference between what is owing on the mortgage and the value of the property, in the opinion of a bank valuer. The valuer is often a bit more conservative in their estimate than the local real estate agent might be (they want you to sell so they often inflate the value as a ploy to get you to list your home for sale with them!)
Providing the stars align and affordability is comfortable to take the plunge, you can use a portion of this new wealth as your deposit on another property in which you would install a tenant to pay rent which you would use to help pay the costs of ownership, such as the mortgage and ongoing property costs. We have put together a worksheet on negative gearing here for your information so you can get an idea of how all that fits together.
In most cases, a lender is comfortable allowing borrowings up to 80% of a property value. This is the threshold beyond which lenders mortgage insurance would usually be payable so, ideally, you don’t breach that percentage but sometimes it is still worth considering. Contact us today so we can advise by carefully analysing your present financial position. It is important you go into this with a cash buffer, when I rented my first property out, a tree fell on the power lines and the resulting power surge took out the heating and the oven in the first week!
Here is an example of the calculation your mortgage broker and lender would perform:
Home Value = $700,000
Mortgage Balance = $375,000
Equity = $325,000
Available Equity in the eyes of the lender is 80% of the Home Value = $560,000
Available Equity $560,000 less your Mortgage Balance $375,000 = $185,000
Contact us today to find out how you can apply that equity toward the next property. (Mortgage Broker Melbourne has a secret recipe for making sure the lender isn’t given too much by way of security, drop us a line and we will take you through our strategy).