Using Property Equity To Buy An Investment Property

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Property Equity – What is it?

Property Equity is essentially the value of your property in comparison to the value of the home loan amount that you owe. So for instance, if you have a property worth $600,000 and the amount borrowed is $200,000, then you have $400,000 in property equity.

If you already have a home loan and wish to borrow more money for the purchase of a subsequent home (which many buyers do as an investment property) then you will find that with existing property equity your borrowing capacity will have increased. This should then enable you to borrow with ease.

Sticking with the figures from our example above, say if that was your financial situation and you wanted to purchase an investment property worth $400,000 along with the associated fees the bank would look at the combined property value, which in this instance would be $1,000,000.

Since banks can usually lend up to 80% without mortgage insurance, you will find that you will be able to borrow $800,000 in this instance. For an investment property, banks can often lend up to 95% of the property value as well including borrowing the fees for the settlement of the property, however any percentage beyond 80% then starts to attract mortgage insurance.

While property equity is a great means to get started on wealth creation, it is highly recommended that you seek advice from a qualified financial planner before going ahead and purchasing anything. The significance of determining what type of property you wish to purchase, how much you wish to spend on it and the most tax effective ways to benefit your financial circumstances prior purchasing the property cannot be understated.

One really needs to consider things such as whose name the property is going to be in, whether you will be the one occupying it yourself or if you will be giving it away on rent for a prolonged period of time, whether you will purchase the property in your personal name, or in the name of a registered trust, or a company name are all valid and necessary conditions to take into account.

If you have already had a home loan for a fair while and have paid off a large chunk of the total property, it might be a great idea to consider debt consolidation and refinance with a lender that will give you a more competitive interest rate than the one you’re on at present. At SwitchMyLoan.com.au we specialise in finding you a home loan deal that beats the one you are on at present!


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