Owning your own home and paying off your mortgage may sometimes feel like a distant dream. However, every mortgage repayment brings you closer to building equity in your property. But did you know there’s a smart financial strategy that can help you make even more progress? In this blog, we’ll explore how you can leverage the equity in your home to venture into property investment without waiting for your home loan to be fully repaid.
The Appeal of Investing in Property
As the great Australian dream, owning an investment property has become increasingly popular for many homeowners seeking financial growth. The exciting news is that you don’t have to sell your home to access the equity you’ve built up. By harnessing your existing home’s equity, you can secure the funds needed to invest in real estate without providing a cash deposit upfront. This clever approach has been widely embraced by savvy investors, with some even financing the entire investment property purchase through this strategy.
Understanding the Equity Utilization Process
When it comes to purchasing an investment property, you can’t leverage the entire equity you’ve accumulated in your family home. Typically, lenders allow you to borrow up to 80% of your home’s value (known as the loan-to-value ratio or LVR), subject to assessment and serviceability.
Calculating Your Available Equity
Let’s consider an example. Say your home is currently valued at $850,000, and you still have a loan outstanding of $550,000. Based on the 80% LVR rule, you would have $130,000 in available equity:
- Property value: $850,000
- 80% LVR: $680,000
- Debt owing: $550,000
- Available equity: $130,000
With $130,000 in available home equity, you can use it as security to cover the deposit (typically 20% or less) and other associated costs for your investment property purchase. As long as you meet serviceability and lending guidelines, you could consider investing in an approximately $650,000 property.
Important Considerations for Your Property Investment
- Property Valuation and Expectations: Lenders often value properties conservatively, so keep in mind that the available equity in your home may be lower than expected, which could impact your purchase price.
- Loan-to-Value Ratio (LVR) and Lenders’ Mortgage Insurance (LMI): Maintaining an LVR below 80% helps you avoid the payment of LMI. However, there are situations where paying LMI for the investment property could enable you to purchase a higher-priced or better-quality property. To make an informed decision, it’s best to consult with professionals such as advisers, accountants, and finance experts who can guide you on the potential benefits and consequences.
Factors Affecting Your Borrowing Capacity
Lenders consider several crucial factors when assessing your borrowing capacity for property investment, including:
- Your credit score
- Your income, existing loans, and debts, along with the serviceability of any shortfall between rental income and investment property costs
- The loan-to-value ratio (LVR)
- Rental income potential
- Your age and retirement exit strategy
- Dependents and other costs that may impact your serviceability
Before embarking on your property investment journey, we highly recommend booking an appointment with us to assess your borrowing capacity. and determine the optimal timing for purchasing an investment property. By strategically utilizing available equity, you can take significant steps toward achieving your financial goals while still paying off your mortgage and moving closer to owning your dream home. Embrace the possibilities that property investment can bring and set yourself on a path to financial prosperity.