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Using equity to buy an investment property
Are you watching others around you build their property portfolios and wondering how to buy your own investment property without blowing all your savings? If you own a home, you could harness the power of your home equity to get a kick start.
Home equity is the difference between your home’s market value and the amount you still owe on your mortgage.
If your home is worth $400,000 and you owe $250,000 on your mortgage, your equity is $150,000.
If you are buying an investment property. you can access 80 percent of your home equity ($120,000 in this case) as security, which eliminates the need for a deposit. This is your useable equity.
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As a guide to calculating how much you can borrow for your investment property. according to the NAB ’s website, a simple rule of thumb is to multiply your useable equity by four. In the above example, it means the maximum purchase price for the investment property would be $480,000. But the real amount you can borrow will depend on a number of variables and will depend on your lender.
Do your sums
Financial planner Deborah Kent, owner of Integra Financial Services, says using your existing home equity is an accessible way to enter the property market. However, she advises caution before making the leap:
“You really have to do the numbers and look at all the costs owning property entails.
If you are buying an apartment, look at costs such as strata fees, how much money is in the sinking fund, whether the building is old and will need work in the near future. All these expenses impinge on your investment return.
“If you are buying a house, keep in mind that while any maintenance you do is tax deductible, if you’re paying $2500 on maintenance you’ll potentially get only half of that back.”
On the home front
Kent also reminds would-be property investors that it is important to repay the home loan on your home as fast as possible.
“The number one rule of financial planning is to pay off your own mortgage because you do not receive any tax breaks,” she says.
“But if you are in a bracket where your income is high and you have good cash flow, there is no reason not to use your home equity to buy an investment property.”
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