Using the Equity in Your Home
If you are a homeowner with an average income, perhaps with some credit card or other personal debt, you might think that property investment in Australia is beyond your means.
However, one of the most effective property investment strategies open to you could be using the equity you have built up in your home as a means of entering the investment market and building your property portfolio.
How do I use equity for investing in property?
The difference between the current value of your home and the amount that remains to be paid off is what is known as the equity value. As an example, if you have a home that is worth $500,000 on the current market, and there is $250,000 remaining to be paid on the mortgage, then the equity in your home would be calculated as being $250,000.
You may be able to use up to 80% of the to buy an investment property if you have paid off at least 20% of your current mortgage. The means that for homeowners who have accrued sufficient equity (and have access to some funds to cover any unexpected rent shortfalls or expenses), it can be much easier than you think to begin investing in property.
How can I build the equity in my home?
If you want to build the equity in your home as part of your property investment strategies, there are some steps that you can take that will help speed up the process.
For instance, property advisers will suggest that you make additional mortgage repayments whenever you can, or increase the size of your regular monthly payments. It might also be helpful to change loan providers in order to benefit from lower repayments, while at the same time maintaining your existing repayment levels, so that you are paying down your loan and growing equity more quickly.
Another way in which you can effectively grow the equity value in your home is through connecting your mortgage account to an offset bank account. This effectively reduces the amount of interest you pay on your mortgage, and therefore means you are paying down the principle more quickly.
What is the impact of Lenders Mortgage Insurance (LMI)?
(LMI) can be a way of getting finance for property investment in Australia if you don’t currently have sufficient equity in your home.
If you don’t have the full deposit required (usually 20%) to purchase a property, a bank may be willing to reduce the deposit requirement to 15%, or even 10%. Therefore, as they are taking a greater risk by lending you more money, they charge LMI to safeguard themselves. LMI is a sum that can be added to the loan and capitalised in it, so you don’t have to pay this amount up front.
In simple terms, this might work as follows: you are looking to buy an investment property worth $500,000, which would normally require a deposit $100,000, but you only have $75,000 of equity in your home. Adding LMI to your investment loan may, however, enable you to borrow the full $425,000 required to complete the purchase. (This is, of course, dependent on your ongoing ability to meet the costs of the loan.)
Some people are hesitant about Lenders Mortgage Insurance, as it does mean that your loan is likely to cost you more. However, the best property investment advice would suggest that the key to successful investing is the length of time you hold a property, rather than the time at which you enter the market. Therefore, despite the additional costs, if LMI enables you to buy an investment property sooner rather than later, so that you own your investment property for longer, it is undoubtedly a strategy worth considering.
If you want to know more about Lenders Mortgage Insurance and whether it’s right for you, talk to one of our property advisers and we will be happy to guide you.
Is using the equity in my home the right property investment strategy for me?
We would always encourage anyone looking to buy an investment property to consider a range of property investment strategies, and using the equity in your home is one from which many investors have benefitted.
At High Income Property, we provide quality that will help you grow wealth and achieve prosperity through property. We can advise you as to whether unlocking the equity in your home to finance an investment property is the right approach for you, as well as connecting you with the best available financial products designed to facilitate your purchase.
We can also advise you on the best suburb to invest in, along with advice on other investment strategies, such as and dual income properties.
Call High Income Property on (02) 8007 4001 or and one of our expert property advisers will tell you more about the benefits of investing in property using your home equity.