‘Home Equity’ is one of the best ways homeowners can buy an investment property. If you are a beginner in the property investing industry, you might not know what exactly home equity is. In simpler words, homeowners can borrow against the equity in their current home. The amount generated can be used to buy an investment property. There are several ways to opt for home equity. These include loan top-ups, supplementary loan accounts, investment property loans, and so on. Let’s take a look at all these factors in detail. But first, let’s understand:
What is Equity?
You can calculate equity in the following way:
Equity = The current market value of your property – Remaining balance on your home loan For instance,
if your current home costs $800,000 and you have $450,000 on your mortgage, the equity will be $350,000. Equity can also be increased if the market value of your home increases. The equity will also grow over the years as your loan amount is reduced with principal and interest. This equity can be used for renovating the home, buying an investment property, etc.
What is usable equity?
The usable equity is the amount you have access to and can borrow against. Usually, the usable equity is 80% of your property’s current value minus the mortgage. For example, if the value of your home is $400,000 and $100,000 owing on the mortgage. Then the usable equity is:
$400,000 x 0.8 =$320,000
$320,000 – $100,000 (in existing loans)
Usable equity = $220,000.
You can use this usable equity to enhance the cash flow, or as deposits for your new home. Your existing property can also act as a security for the new debt. You buy an investment property through equity in several ways. However, you must first weigh the pros and cons associated with these methods.
Home loan top up
Through this method, you will be applying to increase your existing home loan limit to receive funds. This proves more beneficial than saving for a cash deposit. The top-up amount is then added to your account in cash. These funds can be used to buy an investment property. However, before opting for this method, you should ask your lender if this is possible for your loan type. You are likely to increase the repayments over the original loan term. To know how much the repayment will cost, you can use a repayment calculator.
Supplementary loan account
If you don’t want to increase your current home loan balance, you can set up a supplementary loan account. Doing this will help you choose different features that might not be available in your current home loan. You can also decide on a different loan term. However, this type of loan may last longer than your existing loan. This will also increase the number of years and the interests associated with it.
In this method, you can use your existing property as collateral and add it to the new investment property loan. Compared to other alternatives, this method is more flexible. In this situation, you will be dealing with two loans related to the original mortgage and the new mortgage.
Therefore, to know which method suits your needs and requirements the best, you should manage the repayments and costs associated with investment property. Our experienced property brokers in Perth will help you know everything about first home owner’s loans, investment loans in Perth, etc. We will understand your needs and requirements first and provide you with the best investment advice. Contact us!