Saving for your first or 20th property is no joke – it takes time, diligence and a lot of effort. However, if you are eager to dig your toes into the real estate market without having enough in your bank account, you can tap into the hidden potential of your current property – the equity in your property.
Equity is the difference between the value of your property and the amount you still have to pay on it. You can use this not so secret treasure to finance renovations, gain access to money or buy property for investment.
Most lenders can allow you to borrow up to 80% of the total value of your property less the amount you currently owe against it. However, if you purchase mortgage loan insurance (LMI), you may be able to borrow more than 80%, depending on the lender and your financial situation.
Calculating your home equity
To calculate your available assets, subtract what is currently owed on your property from its overall value.
For example, if your property is worth $ 500,000 and you still owe $ 200,000 in mortgage payments, you have $ 300,000 of untapped equity. Using a rule of thumb of 80% of property value, borrowing up to 80% of $ 500,000 can give you a pre-approved capital limit of $ 400,000.
If you subtract your unpaid mortgage repayments by $ 200,000 from your pre-approved capital limit of $ 400,000, you have $ 200,000 in equity. You can use this amount for a deposit and other fees related to your investment property.
Keep in mind that the calculation involves the current value of your home, which may differ from its purchase price because the value may have increased over time.
When you borrow up to 80% of the value of your property, you can avoid paying for LMI. However, if you plan to borrow more than 80%, be prepared to shell out money for LMI – designed to protect the lender in the event of default on your equity loan.
Finance your investment
The equity in your home could be used to finance your investment property without drawing on your savings. It can be a smart way to build your wallet without dirtying your pockets.
Once you have determined the equity in your home, the next thing to do is determine the investment property that works best for you and your financial situation.
Some of the factors to consider when choosing a property to invest are:
Location. Popular areas such as suburbs near the city center may attract more buyers or tenants for your property. Check out our Top Suburb page to get a closer look at the suburbs that are worth the investment.
Economy. Research the economy of your favorite region, as it greatly affects property prices. New infrastructure connecting the region to neighboring towns or making transportation available also affects property prices.
Employment. People would like to live a little closer to their workplace. When a region’s economy is booming, with more business opening, there is a good chance that more jobs will be created. With more jobs and more people to house, properties are becoming more in demand to house these people. You can consult the Australian Bureau of Statistics for employment and unemployment rates.
Population. The population and the real estate market go hand in hand – more people means that more housing is needed to accommodate the population. The latest figures from the Australian Bureau of Statistics indicate that the country's population is expected to double by 2075. However, the three levels of government collectively finance only 1.2% of new housing, leaving 98.8% of housing in the country. private sector.
Increase in equity capital
Increasing your equity can help you access a larger amount that you could use to buy an investment property. Here are some ways to improve your equity:
Increase the value of your current property. Focus on improving the market value of your existing property. Some renovations and improvements can increase its value without exploding your budget.
Make more refunds. Paying back more than you have monthly can spread your accumulated interest over the life of your mortgage, which could improve your equity.
Risks involved
It is tempting to access the untapped investment potential of your current home. However, you should always weigh the pros and cons before deciding if it is the right choice for you. Some of the risks you may want to consider are:
Larger refunds. Since you are going to increase the money you owe on your mortgage, expect larger repayments. Make sure to discuss your options with your lender. Find out how much you can pay for your monthly repayment.
Ask yourself: How can I make larger repayments if my investment does not materialize immediately? This is great for planning your finances ahead of time and seeing where your repayment increases can fit in.
Greatest interest. If you are unable to repay your loan quickly, you may be faced with a higher interest rate. If you spread your loan over 25 to 30 years, you could end up paying thousands of extra dollars in interest.
Consider paying down the debt as soon as possible. Talk to your lender about your options. You may be able to split the loan into two separate accounts – the interest would be the same – but you would be more focused on paying off debts as they have separate statements and repayments.
Risky return. When you tap on the property in your current home, you can use it to invest without investing in your savings. However, if your investment does not give the return you want or if you make a loss, it will strongly affect your finances – you must still repay your equity loan without financing your investment.
Think carefully and long if leveraging equity is the right strategy for your investment and your finances. Seek the advice of a professional to better understand the risks involved.
Do not just follow the pack, do your research and adapt your decisions according to what would work for YOU. Only invest if you are 100% sure that you can afford the repayments. It may also be a good idea not to use all of your available capital at once. You can keep some reserve for maintenance and repairs or savings for a later period.
Top suburbs:
bligh park
,
sth toowoomba
,
Padbury
,
Canterbury
,
Glendenning
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