A home equity loan gives you access to the wealth you’ve accumulated in your property, and is what you would want to secure if planning to purchase a second or third property, or even to renovate homes. It is defined as the difference between the value of your home and the amount of your debt.
For instance, if you owed $100,000 and your home value is $450,000, the total amount of your home equity will be $350,000. Generally, you can access 80% of your equity. Therefore, you are allowed to apply for a loan worth up to 80% of $450,000 ($360,000), minus the $100,000 already owed = $260,000.
In an interview with Your Investment Property, Royden D’Vaz, Bluestone national head of sales and marketing, shared the different adjustments investors need to make in order to make this kind of loan work for them.
Your Investment Property: What are the requirements in applying for home equity loans?
Royden D’Vaz: One of the most important factors to obtain a home equity loan is to make sure the borrower has sufficient equity in their homes, i.e.: the value of the property minus what they owe to the lender/bank. The borrower can then leverage this equity as a deposit for their borrowings to buy an investment property.
Ability to service the loan is an important part of achieving the desired outcome of buying an investment property. Relying solely on the rent gained from the tenants will not be sufficient to get a loan approved. So, their normal income together with 80% of the rental income minus their expenses will have to be income used to service the new loan.
The lender will also need the contract of sale for the intended investment property before proceeding with assessing the loan.
YIP: How can this kind of loan be approved faster?
RD: The best thing borrowers can do to achieve the fastest possible turn-around is to be prepared from the get-go and make sure they have everything they need to get their application assessed, including documentation that proves income and expenses.
Make sure all the documents you provide cover relevant date ranges - such as the most recent three months’ of personal bank statements. If your accounts show some unusual activity make sure you enclose a detailed explanation. That could include things like large one-off expenses.
Also, make sure all loan applicants are available to be contacted for further information [are] needed to complete the settlement when the time comes. We highly recommend not to go overseas while a settlement is in progress.
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