Did you know you can use the equity in your house to finance the purchase of an investment property?
We sat down with Bankwest Lending General Manager Carolyn Morris to learn some of the basics.
"Many first-time investors are unaware it's possible to use the equity they have built up in their home to finance or buy an investment property," says Morris.
"Knowing the basics about home equity can help you become a property investor."
Here's some tips on how to calculate your available and useable equity, and things you need to consider to work out the cost of accessing your equity.
What is home equity and how can it help me?
Home equity is the difference between your property's current market value and any debt held against it.
"The good news for first-time investors is that equity may be able to be used towards the purchase of an investment property," says Morris.
"Depending on your particular financial circumstances and the amount of equity available in your home, you may even be able to finance the entire purchase price of your investment property, including any additional costs such as stamp duty and settlement fees."
It's important to remember that you may not be able to use the entire amount of your available equity, as a dip in property prices could leave you exposed.
"If your financial circumstances permit, a bank will more typically lend you 80% of your home's current value, minus any debt still owing," says Morris.
How to calculate your home's useable equity
Morris gave us an insight into working out your home's potential useable equity.
"As an example, let's say your home is worth $500,000 on today's market and you still owe $200,000 on your mortgage. That means your available equity is $300,000. Using the 80% lending-to-value ratio (LVR), we can calculate how much potential useable equity you have to contribute to your new investment property," she says.
So based on that example:
• Your home's value x 0.80% = $400,000
• The amount of outstanding loans: $200,000
• Your home's potential useable equity: $400,000 – $200,000 = $200,000
Looking at the above calculation, may have $200,000 of useable equity towards the purchase of an investment property.
"Bear in mind that you'll still need to show the bank you can afford the repayments on the full loan amount, which will include the previous mortgage plus the new one," says Morris.
How much can I spend on my investment property?
To determine the value of an investment property you may be able buy, Morris says the a general rule of thumb is to multiply your useable equity by four.
"If the potential useable equity on your home is $200,000, you may be able to purchase an investment property worth up to $800,000 inclusive of stamp duty, legal fees and other costs, subject, of course, to your ability to afford all repayments," she says.
How much will it cost to access my equity?
There are various factors that can impact the cost of accessing your equity.
Morris says if you want to access more than 80% of your useable equity, you'll need to pay for lenders mortgage insurance (LMI), the price of which varies greatly depending on the lender, the level of risk and the interest rate charged.
"If you decide to switch lenders, you'll need to take into account additional costs, such as application and government fees. There may also be costs associated with closing your current loan product, especially if your home loan predates 1 July 2011, when exit fees were abolished," she says.
By using the available equity in your home, buying an investment property might be an achievable goal.
It's a good idea to speak to a trusted lender for specific advice that takes your personal financial situation into consideration, as well as other professionals such as your accountant, and property experts.