How to get into property investing using your existing money
For many Australians, the dream of property investment begins with the equity built up in their own home. Equity - the difference between your property's market value and the outstanding mortgage - is a valuable asset that can be leveraged to acquire investment properties, potentially accelerating your wealth-building journey.
Understanding Home Equity
Home equity is calculated by subtracting your remaining mortgage balance from your property's current market value. For instance, if your home is valued at $700,000 and you owe $300,000, your equity stands at $400,000. However, lenders typically allow you to access up to 80% of your property's value without incurring Lenders Mortgage Insurance (LMI). This means you could potentially access up to $560,000 in equity (including existing debt), though the exact amount depends on your lender's policies and your financial profile .
Using Equity to Fund Investment Properties
Leveraging your home equity involves borrowing against it to finance the purchase of an investment property. This approach can be particularly advantageous for those looking to expand their investment portfolio without needing to save for a substantial deposit. By using the equity in your primary residence, you can potentially secure a loan for a second property, thereby diversifying your investment assets.
However, it's crucial to approach this strategy carefully. While the potential for capital growth and rental income is appealing, property investments come with risks, including market fluctuations and unforeseen expenses. Therefore, it's essential to assess your financial stability, investment goals, and risk tolerance before proceeding .
It is also essential to ensure you create the most tax advantageous strategy. Always consult with your accountant to ensure you are setting yourself up correctly.
Key Considerations Before Leveraging Equity
Before tapping into your home's equity, consider the following:
Tax efficiency: Consult a tax professional to ensure from the outset to ensure you have structured things as optimally as possible. This can potentially save you tens of thousands down the track.
Financial Stability: Ensure you have a steady income and a manageable debt-to-income ratio. Lenders will assess your ability to service the new debt alongside your existing obligations.
Backup Funds: It's advisable not to use all your accessible equity. Retaining a financial buffer can provide security in case of unexpected expenses or changes in income .
Loan Structure: Understand the terms of the loan you're taking out. Fixed or variable interest rates, loan duration, and repayment schedules can significantly impact your financial situation.
Property Research: Conduct thorough research on potential investment properties. Consider factors such as location, rental yield, and long-term capital growth prospects.
The Path to a Second Property
If you're contemplating purchasing a second property, your current home's equity can serve as a valuable resource. By using the equity as a deposit, you may be able to avoid the need to save for a new deposit entirely. For example, if your home is valued at $800,000 and you owe $250,000, your equity is $550,000. Using up to 80% of this equity could provide a deposit for a second property up to $390,000.
This strategy allows you to expand your property portfolio without the lengthy process of saving for a new deposit. However, it's important to ensure that the rental income from the new property can cover the additional mortgage repayments and that the investment aligns with your long-term financial goals.
Final Thoughts
Utilising your home's equity to invest in property can be a powerful strategy for building wealth. However, it requires careful planning, a clear understanding of the associated risks, and a commitment to ongoing financial management. By approaching this strategy with diligence and informed decision-making, you can potentially unlock new opportunities for financial growth and security.
Before proceeding, it's advisable to consult with a mortgage broker to assess your individual circumstances and ensure that leveraging your home's equity aligns with your overall financial plan. Reach out today and let’s chat.