Understanding Property Equity
For a first time property investor, equity can seem like a complicated idea. Simply put, equity is the value of your property after subtracting the amount you owe on it.
If you have paid a decent portion of your loan or if your home has increased in market value, you can use the existing equity in your property for:
- Purchasing additional property
- Renovations or maintenance on your home
- Investing in shares or managed funds
- Lifestyle purchases such as a holiday or a new car
It’s an especially valuable resource when it comes to property investment as it allows you to build a portfolio without saving up for a deposit.
How it Works
Let’s say the market value of your existing home is $400,000 and you still owe $200,000 on your mortgage. That would give you an equity of $200,000. As an investor you can generally access up to 80% of your home equity, which would be $120,000 in this example.
Say you wanted to buy an investment property with a market value of $400,000. A lender will fund 80% of the property’s market value (or more if you pay Lenders Mortgage Insurance). That would give you $320,000 to buy the investment property.
Let’s say additional costs such as stamp duty and legal fees add up to $20,000 in this example. This means you still need $100,000, which can come from the equity in your existing home.
How Much Equity Do You Have?
To find out how much equity you have in your home, you need to get a professional property valuation. Your mortgage broker can usually organise this for you. During the valuation process they will look at multiple aspects of your home, including:
- Building structure and condition
- Presentation and fit-out
- Access (parking, vehicle access)
- Local zoning and planning restrictions
The valuer will combine recent comparable sales in the area and market conditions along with these attributes to produce a valuation report.
How to Build Equity in Your Home
After a valuation, you may find you don’t have sufficient equity in your home to fund further investments. Alternatively, you could opt to pay Lenders Mortgage Insurance (LMI), which could allow you to access up to 95% of the investment property value.
But there are a number of ways you can build equity in your home to improve your overall financial position:
- Increase property value through renovations
- Reduce your loan balance
- Opening an interest offset account, allowing you to offset your savings against your loan balance, reducing the interest you pay on your loan
Before making any decision it is advised to talk with a mortgage broker first to obtain advise on the best option for you.
Using the equity in your home means the total amount you owe on your home loan increases, which might lead to higher monthly repayments. Many property investors argue it’s important to repay the loan on your home as soon as you can.
While the equity drawn from your home for an investment property is tax effective, any remaining debt on your home isn’t. The point is that the loan on your home costs more than the loan on an investment property would.
For more information on how to access the equity in your home, speak with one of our friendly brokers at Multi Choice Home Loans. We are the local mortgage experts in Queensland, with offices across Brisbane, the Sunshine Coast, Beenleigh and Hervey Bay. Call us on 1300 36 36 99 or get in touch online.