For many people, the first property purchase is their own home. However, over time if you have been diligent in paying off your mortgage and with good luck & planning the value of your property has increased in value, then your equity position will have improved too.
Property investment becomes a distinct possibility.
Put simply, equity is simply the difference between what your property is worth and what you owe. So, if you have $300,000 to pay off on a home worth $500,000, your have $200,000 worth of equity. This equity can then be used instead of stumping up a cash deposit to purchase in investment property. And providing you have sufficient equity you can effectively borrow the full purchase price and costs associated with the purchase – all the time avoiding nasty mortgage insurance costs.
The trick is that to get the most benefit – you need to keep your total loan under 80% of the total value of your properties.
Let me demonstrate with an example:
You want to purchase an investment property valued at $400,000. Your current home is valued at $500,000 and you currently owe $300,000. Let’s assume that the total costs to purchase including stamp duty, legal fees and loan fees are $20,000. So, your new loan needs to be $720,000 comprising:
• $300,000 to cover the cost of your existing home loan debt
• $400,000 to cover the full purchase price of the new investment property
• $20,000 to cover costs
Given that the total value of all the properties is $900,000 (being $500,000 for your home and $400,000 for your investment property), your loan to value ratio ($620,000 divided by $900,000) is 80% so no mortgage insurance should be payable.
Keep in mind that while equity is a good way to come up with a deposit, you still have to demonstrate you can afford to service the total loan amount. Your lender can help you with this – taking into account any rental income you are likely to receive, as well as any existing commitments.
Of course before taking any such course of action, speak with your financial advisor to make certain this is a good plan for you.