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Unlocking the Power of Equity: A Guide to Buying Investment Property with Ease
By Deltos Finance on July 29, 2023
Investing in property has traditionally been a popular path to building wealth for many Australians. For homeowners with accumulated equity, it presents an opportunity to expand their real estate portfolio. In the Australian real estate market, despite the peaks and troughs, property values have shown consistent growth over the years. This is why many people choose to tap into their equity to build their investment property portfolio. But how should you go about it?
We’ll explore how you can harness the power of equity to purchase an investment property. Additionally, we’ll delve into Deltos Finance’s expert guidance — how they may help ensure a seamless & successful investment journey.
First, Let’s Talk About Equity and Usable Equity
Equity reflects the difference between your property’s current market value and the outstanding amount you owe on your mortgage. When you purchase a property with a home loan, you make regular mortgage payments to reduce the loan balance, and over time, as property values appreciate, the equity in your property grows. Equity can be thought of as a form of wealth you have built up in your home.
For instance, if your property is currently valued at $500,000, and you still owe $100,000 on your mortgage, your equity in the property would be $400,000. But the question is: can you access and use that equity to buy an investment property?
This is where understanding the term “usable equity” comes in handy. Usable equity refers to the portion of equity that lenders take into consideration when assessing your borrowing capacity. While you may have accumulated significant equity in your property, not all of it may be accessible for borrowing purposes.
You can determine the usable equity by calculating 80% of your property’s current value and then subtracting the outstanding mortgage amount. So using the example above, if your home is currently valued at $500,000 and you still owe $100,000 on your mortgage, you can calculate the usable equity using the following equation:
$500,000 x 0.8 = $400,000
Subtract $100,000 in existing loans.
Therefore, your usable equity would be $300,000.
When you know your usable equity, you can make informed financial decisions, such as using it to invest in another property or financing other significant expenses.
Leveraging Usable Equity: Strategies for Buying Investment Property
Now that you understand the difference between equity and usable equity, it’s time to learn how to buy investment property with equity. Here are some strategic ways to leverage usable equity and capitalise on the Australian real estate market’s wealth-building opportunities:
Home Equity Line of Credit Loan
A home equity loan, also known as a line of credit or equity loan, allows homeowners to tap into their usable equity as a separate loan. This additional cash can be used as a deposit for an investment property. Homeowners generally only pay interest on the amount used, gaining flexibility & control over their financial situation.
Equity Release
Refinancing your existing home loan may enable you to access additional funds from your usable equity, which can then be directed towards the purchase of a rental home or any investment property. This strategy may involve changing your loan structure, terms or interest rates to suit your investment goals better.
Cross-Collateralisation
While less common, cross-collateralisation involves using the equity in your current property as security for an investment loan. It’s when a loan (or multiple loans) are secured by multiple properties. This approach can help to reduce risk for the lender, which sometimes helps to get a better interest rate, and may offer taxation benefits. However, cross-collateralization may carry higher risks for the homeowner. This is because your property portfolio loans are with one lender and the cumulative values impact your overall loan to value ratio (LVR). This can cause complications when seeking more finance or looking to sell one of your properties. Hence, seeking expert advice is essential before considering this strategy.
Key Considerations Before Buying Investment Property with Equity
As with any significant financial decision, it’s essential to assess your circumstances and the potential implications of using equity to buy an investment property. Here are some critical factors to consider:
- Financial Stability: Evaluate your financial stability and capacity to manage the additional financial responsibilities of owning multiple properties. Consider factors such as rental income, property management costs and possible vacancies.
- Investment Strategy: Define your investment strategy and long-term goals. Determine whether you seek rental income, capital appreciation, or a combination of both. Then, align the investment property with your overall wealth-building plans.
- Loan Structure: Speak to a mortgage broker to determine the most suitable loan structure for your situation. The right loan structure can impact cash flow, tax benefits and long-term returns on your investment.
- Risks and Rewards: Understand the risks and rewards associated with property investment in the Australian market. Spend ample time conducting thorough research on property market trends, rental demand and potential capital growth in the chosen location.
Deltos Finance: Your Trusted Partner in Property Investment
Simply put, using home equity to buy investment property requires expert guidance — Deltos Finance is here to help. As Hobart’s #1 mortgage broking team, our experienced brokers specialise in assisting Australian homeowners with their property investment dreams. We may start with a comprehensive assessment of your financial situation to determine the amount of usable home equity. Then, we’ll explore the best loan options that align with your investment goals.
Our extensive network of lenders allows us to secure competitive interest rates and loan products in the Australian market. More importantly, we handle the paperwork, negotiations and application process, making the journey from equity to investment property ownership seamless and effortless.
With Deltos Finance’s expert guidance and personalised support, you can confidently unlock the potential of your equity and embark on a successful investment journey. Reach out to us today to get started.
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