You may be chasing more affordable prices, dreaming of a lifestyle change, or spotting investment potential in a different market altogether. No matter the reason, buying property in another state can be pretty tempting. But let’s be clear: buying interstate isn’t quite the same as finding a place down the road. You may have to […]
How to Use Equity to Buy Another Property
By Deltos Finance on July 17, 2024
As a homeowner, you’re sitting on a valuable asset that can do more than provide a roof over your head. Your property’s equity can be a powerful financial instrument to help you buy a second home or expand your real estate portfolio. So, whether you’re dreaming of a holiday home by the beach near Carlton or looking to start your journey as a property investor in Hobart, you must understand how to use equity to buy another property. That’s exactly what we will explore throughout this article.
What Is Equity in a Property?
Before exploring the nitty-gritty, let’s clarify what we mean by equity. It is the difference between your house’s current market value and the exact amount you still owe on your mortgage. It’s the portion of your property that you truly “own.”
For instance, if your house is worth $500,000 and you have $300,000 left on your mortgage, your equity would be $200,000. This equity builds over time as you pay down your mortgage and your property (hopefully) increases in value.
How to Calculate Your Usable Equity
Now, here’s where it gets interesting. While you might have $200,000 in equity in our example, you typically can only use some of it. Lenders usually allow you to borrow up to 80% of your property’s value minus your outstanding mortgage. That is what you call “usable equity.” Let’s break it down:
- Property value: $500,000
- 80% of property value: $400,000
- Outstanding mortgage: $300,000
- Usable equity: $400,000 – $300,000 = $100,000
So, in this scenario, you could potentially access up to $100,000 of your equity to invest in another property.
Three Ways to Use Your Home’s Equity to Buy Another Property
The good news is you’ve got multiple options. Here’s how to use equity to buy another home or investment property:
- Through a Home Equity Loan
A home equity loan allows you to borrow a lump sum against your usable equity. It’s like taking out a second mortgage, often with a fixed interest rate and term. So, you’ll have additional repayments on top of your original monthly home loan repayments. This can be a good option if you know exactly how much you need for your property purchase.
- Through a Home Equity Line of Credit (HELOC)
A HELOC functions more like a credit card. You’re approved for a certain amount based on your usable home equity, but you only draw (and pay interest on) what you use. This flexibility can be handy if you aren’t sure exactly how much you’ll need for your property purchase or if you want to have funds available for renovations.
- Through a Cash-Out Refinance
With a cash-out refinance, you basically replace your existing mortgage with a new, larger loan and take the difference in cash. It’s a great option if you’ve already built up a sizeable equity and can secure a lower interest rate when refinancing. You can get a huge sum from cash-out refinancing, which you can use to buy another home outright or as a substantial deposit for a luxury house or investment property.
What to Watch Out for When Using Equity to Buy a Second Property
While using equity to buy a second home or property can be a good financial move, it’s not without risks. Here are some things to keep in mind:
- You’re increasing your debt: Essentially, you’re borrowing more money, which means higher or additional repayments on top of your existing mortgage.
- Property values can fall: If property values decrease, you could end up owing more than your properties are worth.
- Interest rates can rise: Be prepared for potential increases in your repayments if you’ve chosen variable rates for your new loans and interest rates go up.
- You risk having most of your money tied up in the property market: If the market experiences a significant downturn, your wealth could be negatively affected since it has become heavily concentrated in one asset class.
What Are the Steps for Using Equity to Buy Another Property?
- Get your property valued to have an accurate idea of your current equity.
- Calculate your usable equity by using the 80% rule we discussed earlier.
- Speak to a mortgage broker to understand your borrowing capacity and find the best mortgage product for your refinancing or home equity loan needs.
- Get pre-approval to set a clear budget for your property search.
- Start house hunting with your budget in mind.
- Finalise the purchase. Let your broker help you navigate the final steps of securing your home equity or refinancing loan and completing the purchase.
Let Us Help You Maximise Your Home’s Equity
Using equity to buy another house or property can be a smart way to build wealth, but it’s a big decision that requires careful consideration. At Deltos Finance, we’re here to guide you through every step of the process. Our expert mortgage brokers can help you calculate your usable equity, find the best loan product for your needs, and navigate the complexities of residential or property investment.
Contact us today to get started.
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