Leveraging your home equity could hold the key to building wealth through an investment property.
Property is one of Australia’s favourite investments – and with good reason. Residential property has the potential to deliver healthy capital growth for investors.
Add in rental income that can help pay off the investment loan and potential tax savings through negative gearing, and it’s easy to see why over 2.2 million Australians own at least one rental property (ATO).
What’s less well-known, is that homeowners don’t always need a significant deposit to buy an investment property.
If you’re a homeowner, you may be able to use home equity in lieu of cash savings as a deposit on a rental property. Here we explore how to leverage equity for an investment property.
What is home equity?
Home equity simply means the difference between your home’s market value and the balance owing on your home loan.
As a guide, if your home is currently worth $600,000, and you have $250,000 remaining on the mortgage, you have home equity valued at $350,000.
That’s a significant financial resource, and the good news is that you don’t have to sell your home to put home equity to work.
Perth market has strong prospects for investors
On the investment front, Perth is experiencing a tight supply of properties listed for sale and rent. In September 2022, there were only 8,116 properties listed for sale during the week ending 2 October 2022, which is down from 8,160 four weeks prior and 8,360 in the same week 12 months prior (REIWA). The decline of homes available for rent in Perth has continued this month, with only 1,724 properties listed for rent during the week ending 2 October 2022, down from 1,905 four weeks prior and 2,236 from the same time last year (REIWA).
Widespread skills shortages are seeing over one in five WA businesses report job vacancies (ABS). This, along with the Australian Government’s initiatives to address the skills shortage, is driving interstate and international migration to WA, and further fuelling demand for housing.
These factors all work in an investor’s favour. Combined with the current affordability of the Perth market when compared to most other states in Australia, the upshot is that an investment property holds plenty of appeal for long-term investors.
Using home equity to invest
So, how does using equity to invest work in practice?
In most cases, banks will lend up to 80% of the value of your home minus the balance of your home loan. It may be possible to borrow more, but above the 80% benchmark you’ll be asked to pay Lender’s Mortgage Insurance, which can be a significant added cost.
An example here will help to show how banks determine the value of ‘lending equity’.
Let’s say Sue owns a home valued at $500,000. She’s owned the place for about 10 years, and her mortgage is down to $175,000.
A lender will determine Sue’s lending equity based on 80% of her home’s value less her remaining home loan debt.
For Sue, this works out to be:
- 80% of $500,000 (her home’s current value) = $400,000
- $400,000 minus $175,000 (Sue’s home loan) = $225,000
This $225,000 acts as a tidy sum to pay a deposit on an investment property. From there, Sue can source another loan for the remaining balance of the purchase price.
Not only is Sue getting more value from her home equity, she is also able to preserve cash savings.
Invest in expert advice
Accessing home equity can be achieved by refinancing a home loan to free up that equity by creating a ‘cash out’ loan, and then taking out an additional investment property loan for the remaining balance of the purchase price.
However, it is critical to have the right loan structure in place. More so because lenders will often look to structure loans in a way that mitigates their risk, not yours as the investor.
That’s why it pays to invest in good advice.
For more information on how to leverage equity for an investment property, or to book a private consultation on using your home equity to invest in a rental property, please contact the friendly team at Momentum Wealth today.
Our professional team can also review your finances; we can explain the value of your ‘lending equity’ and the opportunities available to you as an investor.
Start the ball rolling via the following form. And use this opportunity to download our free Guide to Unlocking your Home’s Potential: