With every repayment you make into your home loan, you’re building up equity in your property – be it your principal place of residence or investment property. This means that over time, especially if property prices are rising in your suburb, you may have built up considerable equity after a few years. But how can you best use your equity to buy an investment property?
What does equity refer to?
Equity is the difference between the current value of your property and your loan balance. Your home’s equity will increase by your loan balance decreasing or by your property’s value increasing. Depending on your loan type (for example, if your loan repayment type is Principal and Interest), and whether property prices are rising in your area, both of these levers may be working in your favour.
If your property is valued at $500,000 and your loan balance is $300,000, then you have $200,000 equity in the property. You may be able to borrow up to 80% of this equity. Speak with your lender or your mortgage broker to learn more.
You can utilise your equity without having to sell your home. The most common ways to access equity are:
- Increasing the size of the existing loan
- Taking out a second loan against the property
- Refinancing your home loan to a different lender
It’s important to remember, each option above will increase your total loan amount and that you are borrowing more money to put towards the deposit for the investment property. This also means you will be paying additional interest on the money used for the deposit – this is important to understand when estimating monthly cash flow.
If you’re looking to purchase an investment property, you can avoid saving for the deposit, by using the equity in your existing home or investment property. The process kicks off, with your lender requesting a valuation to identify your property’s current market value, based on recent comparable sales. This valuation will then be used to determine what your usable equity is. Remember, lenders will consider your income, your partner’s income, number of dependants, living expenses and other loans you and your partner may have – for example, personal loans and HECS repayments. Once approved, lenders will then typically release up to 80% of the equity against the property.
Alternatively, you may wish to use the equity to renovate or make improvements to your home. During Victoria’s extensive lockdowns, we are seeing more and more people utilise the equity in their home to renovate or extend their principal place of residence. Withdrawing equity for a renovation is a very popular strategy, and you may also see an increase in your property value, once the renovation is complete – especially if the renovation is “adding value” to your home, such as adding an extra bedroom or bathroom.
Finally, it’s worth carefully thinking about which lender to approach for the investment loan. If you select the same lender as your principal place of residence, the lender may cross-securitise the new loan. It’s important you understand what this means. This is when the loan on the new property, is secured by both the new property and the value of your existing property – essentially one loan being secured by two (or more) properties.
Cross-securitisation can limit your flexibility so you need to be mindful. For example, if you need to sell one property, the lender may require that some of the sales proceeds are used to repay some of the loan balance to lower the overall loan-to-value ratio.
Once you have the equity – now what?
Once you have established how much equity you need to purchase an investment property, it’s time to start your research.
Decide up front, how much effort and time you’re willing to invest into selecting, purchasing and maintaining an investment property. Are you looking for a property that you can rent to tenants immediately? Or are you prepared to invest time and energy into a renovation and extension to add-value?
Typically, you can find the best value in properties that are in need of a renovation, but this will create additional work for you. Do you have property maintenance skills yourself, or will you have to outsource everything? Remember, there’s no right or wrong answer here – it depends what is right for your situation.
Undertake your due diligence and check the neighbourhood to see if it’s a nice, safe place where you’d want to live long-term. Here are a few questions to consider as you walk through the street and neighbourhood:
- Does it appear safe and family-friendly?
- Is it a busy area? Can you hear traffic noise when inside the home? Is the street a thoroughfare during peak times? What is traffic like on weekends?
- Are lawns and front-gardens maintained by neighbours? Does it appear to be a tight-knit community? Do neighbours appear to talk with each other?
- Does the area appear to have more renters, or owner-occupiers?
- Are there amenities nearby? Where is the nearest hospital or medical centre? Are there cafes and local shops nearby?
- Are there transport options such as a train or bus?
- Are there parks and nice public spaces nearby?
- Are there well-regarded primary and secondary schools nearby and does the property fall into any school zone(s)?
Always seek advice from a trusted professional.
Purchasing and investing in real estate is exciting and when done well, can significantly transform your life. Now is a great time to get started on your property journey, or continue climbing the property ladder, as interest rates are at an all-time low. Our agency is also seeing high-quality family-oriented supply begin to come onto the market, and this is set to continue as we progress through Spring and approach Summer.
To learn more about the benefits of real estate investing and what prices may do long-term, please contact us at One Agency. With One Agency being one of Mildura’s most trusted real estate agencies, we are well placed to provide you with our view of the current market based on our local experience. We’ll thoroughly guide you through the process and help you take advantage of this opportune time in the property market.