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Equity is your property’s current market value minus your remaining mortgage balance. Essentially, it’s the portion of the property that you own.
You build equity over time as you pay down your home loan and as the value of your property increases. You can use an online home equity calculator to get an idea how much equity you have.
Your property’s equity can be a useful tool for your next investment property purchase. But how does it all work? Using equity adds a few more steps to the standard home buying process, but does offer a range of benefits.
Ways to use equity to buy an investment property
There are several ways to use your equity to buy another property. Understanding the pros and cons can help you make an informed decision.
Refinance your current loan
You can access your existing equity by refinancing your home loan. This allows you to use part of your equity as a deposit for your next investment property, meaning you may not need to shell out a full cash deposit.
It’s important to note the total equity of your home is not the same as usable equity.
Lenders will typically hold some of your overall equity as security for the loan. The usable equity is the difference between 80% of your existing property’s value and the current balance on your home loan.
When you refinance your current property, however, it increases the amount you owe and how much interest is charged overall. In essence, you’re extending your current mortgage to buy another investment property and use the equity from the existing property for the deposit.
If you want to learn more about refinancing your loan, get in touch with the lending specialists at loans.com.au. They’d be more than happy to walk you through how to access your equity and find a refinance solution that suits your needs.
Cross-collateralise to buy an investment property
As the name suggests, this method involves using your existing equity to secure a loan for a property purchase. With cross-collateralisation, your existing property and new property will be used as security for the loan, which may reduce or remove the need for a separate cash deposit.
Because both properties are connected to the loan, the lender may have claim over both assets if you fail to make payments.
This method may make buying a new investment property more affordable; however, it does make selling either property more complicated.
What to consider when using equity?
There are several factors involved when you use your equity to buy another property. Before you make that decision, consider the following:
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Usable equity amount – First and foremost, you need to calculate how much equity you can use. When you have a concrete number, see if it’s enough for a deposit for your new property.
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Costs – Refinancing or cross-collateralising your current mortgage may involve extra fees. Make sure your finances can handle the additional cost of buying another investment property, plus the associated cost of modifying your home loan.
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Financial goals – Is buying another investment property in line with your long-term investment goals? There are risks to using equity to buy another property, so make sure you take those into account.
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Tax obligations and implications – Do your research or enlist the help of a finance professional so you know what your tax obligations are. You may also be eligible for certain tax deductions for your investment property, but it’s best to consult with an expert to be sure.
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Loan – Does your loan allow you to access equity? Speak with your lender or a lending specialist to understand what you can do with your current mortgage and if there are other options available that are more suited to your investment needs.
Pros and cons of using equity for an investment property
When you use equity for a property purchase, you don’t need to have a lot of savings because you’ll be using your equity in place of the cash deposit. This may allow you to act more quickly to market trends and take advantage of investment opportunities.
The downside of accessing your equity to buy another property is that it increases your overall debt. Equity relies on property values, which are unpredictable at times and could drop, leading to negative equity.
Using equity is also more complicated than a straightforward property purchase. It’s best to weigh the advantages and disadvantages of accessing equity carefully to ensure it’s the right option for you.
Want to learn more about using equity to buy your next property?
Get in touch with the friendly lending specialists at loans.com.au! Learn about how you can use equity through refinancing. Call 13 10 90, or you can arrange a call at your convenience.
Disclaimer: The information provided in this article is general in nature and does not constitute financial or legal advice. Please seek independent professional advice tailored to your personal circumstances before making any financial decisions.
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