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How to use your home equity for an investment property

If the thought of purchasing another property has been weighing on your mind, you might have heard talks or come across several ads that discuss unlocking equity. This is a strategy used by many second-time home buyers, but what does it mean and is it the right choice for you?

What does it mean to unlock your home equity?

If you are a homeowner and have been paying your mortgage for a while, then there is a chance you might have equity in your property. Equity is calculated by deducting money that is owed on the property from its current market value. For example, if the market value of your home is $700,000 and you have $200,000 left on your mortgage, this would mean your home’s equity is worth $500,000.

With the amount of equity in your home, you can put it towards the purchase of your second property. For many buyers, this could be an ideal option if they are looking to buy a holiday home, downsize to a smaller unit, or to invest in bricks and mortar.

How can you use your home equity?

The steps to unlocking your home equity are as follows:

  1. Calculate your equity

Before you dive into viewing what properties are available on the market, determine how much you can afford to spend by calculating your available equity.

2. Explore your finance options

There are various methods when it comes to using your equity to buy an investment property:

  • Using your equity as a deposit
  • Refinancing your mortgage
  • Opening a credit line
  • Taking out a home equity loan

3. Set a budget

Once you know the amount of equity available and how you plan to finance the purchase, you can now allocate a budget for the investment property.

4. Begin the search!  

Research the area, create a checklist and filter your options so you don’t stray away from your set budget.

Tips when applying for finance

Once you’ve gone through the steps, it’s time to apply for a loan. There are some ways to dress up your application and increase your chances of getting approved. You can do this by:

  • Clearing existing debts
  • Making additional payments on your current mortgage or home loan

According to NAB, most banks will usually lend you 80% of the value of your home, taking into consideration the debt you still owe against it. This is considered your useable equity. Banks will also weigh in other factors such as your income, age, family status, and any other debts. Before you enter into a new agreement with the bank, you should speak with a financial consultant to ensure this is the right loan for you.

What comes after?

Purchasing another property is a big step, even if you’ve done it before. Once you’ve got funding secured, ensure to follow these steps:

  1. Do thorough research

If there’s an area that has taken your fancy, gather as much information as you can about it such as public transport accessibility, schools, shopping centres and the overall demographic of the suburb. Shortlist properties that meet your criteria and don’t rush into making offers if it doesn’t tick the boxes.

2. Determine the purpose of the property

Is this new property for you to reside, or are you planning to lease out to tenants? It’s important to know what you’re looking for, so you have a clear goal. If you want to rent out the property, then you’ll have to put yourself in the tenants’ shoes and think about what appeals to them. A young family, for instance, might be looking for a property with a yard, close to good schools, parks, and supermarkets.

3. Stick to your budget

You would know the commitment it takes when paying off a mortgage, so you don’t want additional pressure by overspending on an investment property. Be firm and stay within your budget.

4. Understand your tax liabilities

Purchasing a second property may impact the amount of tax you are required to pay. Research and understand what this investment will cost you, and if you can afford it.

5. Have some buffer money

Whether you decide to use your equity as a deposit or if you choose to refinance, you might find yourself paying more each month. To prevent cash flow issues, it’s always a good idea to have some money in reserve.

Unlocking equity allows buyers to secure a second home or use for investment purposes. If you’re looking to explore this option, the team at FutureNow Finance can advise you in this area and discuss solutions that suit you best. Call 1300 013 730 or email hello@futurenowfinance.com.au