Many Australian’s are in the stage of life where they have paid off a large portion of the mortgage on their own home, wanting to get into property investment market but lack the cash injection required to do so. Considering unlocking the equity in your own home is a clever way to get your foot in the door of the property market and start making steps to reach your financial goals sooner.
Bankwest’s Lending General Manager Carolyn Morris explains “Many first-time investors are unaware it’s possible to use the equity they have built up in their home to finance or buy and investment property… knowing the basics about home equity can help you become a property investor”.
Simply, home equity is the balance between how much your home is valued at in the current market and the debts held against the property. Morris provides an example of how simple it is to calculate the available equity in your home – for example, if your home is worth $500,000 in the current market but you still have $200,000 owing on the mortgage this leaves you with a difference of $300,000 which is the available equity in your home. Typically you will not be able to use the entire amount of your equity as this will leave you financially exposed if there is a change in the market, so banks advise only using 80% of the amount.
By unlocking this equity in from your own home, depending on the value, this can go along way in paying off a substantial amount of the cost of an investment property or simply assisting with paying off any associated costs such as stamp duty, deposits and settlement fees. A typical rule of thumb is to multiply your usable equity by 4 to determine how much you can pay for an investment property. It is important to remember that regardless of available equity, lenders will still assess your ability to repay your current mortgage with the added pressure of another loan. Accessing more than 80% of your equity is considered a higher risk loan so lenders will typically require you to pay Lenders Mortgage Insurance where the costs are determined by the size of the loan and individual institutions.
Accessing your equity in your own home is a clever way to get your foot in the door of the property investment game, allowing you to reap the benefits of strong property values and lower interest rates without finding a lump sum of cash.
For more information on unlocking the equity in your own home to build your property portfolio, contact Solid Investment Property on (03)9690 2666