If you own a property and have been paying off the mortgage comfortably, it could be time to think about taking the next step on the property ladder: investment. For many Australians, an investment property is a fantastic way to generate extra income and secure a long-term asset. Even so, getting a deposit together while paying off a mortgage on the home you live in can be tricky. That’s where equity comes in handy, and in this article we’ll look at what equity is, and how you can use it to buy an investment property.
What is home equity?
Put simply, home equity is the difference between the value of a property and how much debt is owed on it. For example, if your property is worth $500,000 and you still have half of that to pay off on your loan, your home equity would be $250,000. You might think this equity is tied up until you pay off the entire mortgage. In fact, you can use it for all sorts of things, including starting a business, buying a car, going on holiday or purchasing an investment property.
Of course, you can’t use all your home equity. Instead, it’s usually split into ‘total’ equity and ‘usable’ equity, with the latter being about 80 per cent of your total. This usable equity is what you have to play with, and banks will use this as security when you take out a loan on an investment property.
Using equity to buy an investment property
Having home equity doesn’t always guarantee you’ll receive a loan for an investment property. Lenders will also consider your age, income and debts, so it’s worth seeking advice as to whether you’ll be eligible for a loan.
If you do get approved, there are all sorts of benefits to using your home equity as security. First, you won’t have to save for a deposit if you’ve built up enough equity. You’ll also be able to save on Lender’s Mortgage Insurance (LMI), because LMI is typically charged when buyers have a deposit of less than 20 per cent of a property’s value.
If you’d like to find out if you’re eligible to use your home equity for a loan, talk to your Smartline Adviser today.