For property owners, the appeal of buying a second home can be a substantial one. Fortunately the equity value of the first house can be used as collateral, instead of needing to collect enough cash for a deposit.
This is referred to as harnessing the power of equity, and it can help with purchasing a new home for investment purposes, or to live in. Anyone that has owned their home for a few years may have built up equity, which can be a very useful resource as far as buying an investment property is concerned. Our team can help you by finding out how much equity you may have available in your home and how soon you might be able to use it.
What exactly is equity?
Equity, or more specifically your home equity, is a term given to the value of your home based on the market, as opposed to what your mortgage is worth.
For example, if you purchased your home 20 years ago for $150,000, but the market value says that your property is now worth $300,000 – this excess could count toward your equity.
Here’s an example of how your equity could help you with your next home purchase
Imagine for a moment that you want to purchase a new house that has a value of $200,000. If you consider the expenses, taxation and legal fees the total could then amount to roughly $220,000.
Now let’s say that you want to apply for a new loan from a bank – and one that will provide you with 80% of your properties’ current market value, or even more if you don’t mind covering the cost of the lender’s LMI (lenders mortgage insurance). In total, and with the above example considered, your chosen bank could therefore lend you $176,000 at 80%.
If you already owned that home and had a mortgage value of $220,000, but the current market value of your property was now $320,000, that additional $100,000 is your equity – or the additional value that your home is now worth.
And it’s this equity that can be used to cover the difference between the cost of your current mortgage, and the likelihood of you receiving a new one.
In the above example a lender could have access to up to 80% of the value of your home’s equity, which would amount to $80,000. This means that should anything go wrong with your mortgage, your lender would be able to recoup their losses by reclaiming the additional value of your home.
Instead of you needing to save up $80,000 for a deposit, your equity could be used to off-set that balance.
Some important factors to think about
There are plenty of investment experts out there that share the same opinion – and that opinion is that you should aim to repay your home loan as soon as possible. Although the equity that you use for your investment property may be tax effective – the rest of the debts (mortgage) on your home won’t be. This means that you will end up paying more interest on your current property than you would on your investment home, as the equity isn’t used for taxation purposes.
If you already own other properties, then they may also have collated their own equity – in fact this is how many property magnates continue the growth of their assets.
If you’d like to calculate how much equity would be available within your home, then a mortgage broker should be able to help to access these funds for your next investment.
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