If you’ve paid off part of your mortgage or made improvements to your home that have increased its value, you may have equity that could be used to buy an investment property. Equity is the difference between your home’s current value and what you owe on your mortgage, and some lenders will allow you to tap into your home’s equity to use as collateral for a new loan. Done well, this type of property investment can yield excellent results, but you must also understand the risks.
How to calculate equity
Equity is the difference between what your home is worth (the market value) and how much you owe on it (the mortgaged amount). To calculate your equity you’ll need to know the current market value of your property, and the best and most accurate way to determine your property’s value is with a property valuation.
Once you have a property valuation, subtract the amount you owe on all loans secured by your home from its appraised value to determine how much equity you have. Lenders will typically lend up to 80 percent of the value of your home, less any debt you still owe against it. This is considered your useable equity. Some lenders may lend more than 80 percent if you take out Lender’s Mortgage Insurance.
How to access equity
Accessing your equity is done in much the same way as a normal home loan, and starts with a meeting with your mortgage broker or lender to discuss your borrowing power and overall financial situation.
Even if you have enough equity in your existing home for a deposit, you’ll still need to show that you can repay the additional loan amount based on your current financial situation, so be prepared to present the required documents to show proof of your income and expenses.
How to use equity
There are a few ways you can use the equity in your home:
- A deposit on an investment property: If you’re considering buying an investment property, you may be able to use the equity in your existing home to cover your deposit. Your lender will require a bank valuation to assess your property’s market value and determine your useable equity and could release up to 80 percent of your equity subject to serviceability.
- To renovate or remodel your current home: To add value to your property or because of a change in your life circumstances, you may be thinking about using some of your equity to renovate your home – a new kitchen, bathroom addition, or a change to the current layout. Before releasing equity, your lender will require a valuation.
What to Consider
Using your home’s equity to grow your property portfolio and your wealth is a smart move that can be financially rewarding. However, you must be also aware of the risks.
- Market changes – in particular a slump – could impact your property’s value and your overall equity.
- Investment properties come with extra costs such as maintenance, fees, and levies that need to be factored into your investment.
- A change to your circumstances – such as job loss, injury or illness – could affect your ability to repay your additional mortgage.
Before making any decisions about accessing the equity in your property, it’s worth booking a financial review with your mortgage broker. At Lending Connections, you can have access to financial tools that can provide important insight into your property’s value. Contact Lending Connections today to find out more.