Invest using the equity in your home

Understanding equity

Equity is the proportion of your home that you have already paid for. For example: If your house cost $200,000, you put down a $50,000 deposit and mortgaged the remaining $150,000 you would have $50,000 in equity and $150,000 debt.

After living in your property for 10 years, the value would usually have increased and you may also have paid down some of the principal of your mortgage. You may have accumulated around $210,000 in equity.

And that’s enough to help you buy an investment property, provided you can service the additional loan.

Releasing the equity

Most banks and finance companies will recognise the equity in your existing property (or properties) when you want to buy a new one. Of course, they all have different rules and qualifying conditions so it is best to use a broker, like Rob McDougall at Loan Market Townsville, to find one that that suits your needs.

The bank will value your existing property – so make sure it’s looking good – and the new property as part of the application process, and will want a letter from an estate agent about the rental value of the new property.

The bank will then look at how much you want to borrow against all your property – both the new property and your existing property – and give you a mortgage for both of them, or two mortgages, or one mortgage containing two accounts. See how a mortgage broker might be useful at this point?

The bank will also look at your income to see if you can pay off the loan, and will take into account the rental income from the new property.

Things to think about

When you buy a second property you are taking on considerably more debt so make sure that you stress-test your budget. You may be able to afford it now but what’s going to change in the next few years? Will you be paying more school fees? Will your job be the same? Will interest rates go up?

A rise in interest rates could make a big difference to the affordability of the property so make sure you can still pay if rates go up by a percentage point or two.

Also try to maintain a safety buffer of savings to cover the expense of paying both mortgages when your investment property is between tenants – because you won’t have any rental income at that time. And take out landlord’s insurance that includes protection for lost income if the property needs to be repaired.

Investment mortgages and residential mortgages have consumer protections. If you have one mortgage covering both properties, and the investment property is a greater proportion of the debt, then the loan may be considered an investment loan, even though you are living in one of the properties. Talk to Rob about the best way to structure the loans in a way that protects your financial future.