Ever wondered how property investors seem to keep buying properties? It’s because they are leveraging their home equity generated by the rising property value in an existing property to purchase a new one.
Now the question that arises is, what is equity? If you own your home, chances are you’ve built up some equity over the years. Simply put, equity is the difference between the current value of your property and the amount you owe against it. For example, if you have a $550,000 mortgage on a property valued at $800,000, you have $250,000 in equity you can potentially access.
Banks only lend to 80% of the current valuation less than the current mortgage. This is known as your useable equity. Using our previous example, the amount you can borrow against your home equity becomes
$800,000 * 80% – $550,000 = $90,000.
As you can see, it’s significantly lower than the $250,000 available equity, however, the amount is hefty enough so that you can use it to fund your deposit on an investment property or can create an offset account.
It takes a significant amount of time to save enough money for a deposit, so by using equity in this way, you are able to get into the property market and buy at today’s prices. Thus, allowing you to benefit from the coming years’ of growth early. Additionally, through the use of equity, you are able to minimise risk as you are keeping your cash in pocket.
There are some risks to leveraging equity to buy investment properties. Most importantly, you must be certain you maintain a sufficient buffer such that you are able to service loans.
Some effective ways to help you maximise the power of your equity safely is to:
- Educate yourself about investing in property. Leveraging equity doesn’t mean you don’t have the responsibility of researching before buying an investment property.
- Speaking with a professional financial advisor to understand your options and plan of attack. It’s important to have a clear initial plan of how you’re going to set out your finances.
