Is using Equity a smarter way to buying an Investment property?

Using Equity buying an Investment property

If you have enough equity in your home, you may be able to use it to buy an investment property and even to build a property portfolio.

Equity is the difference between the current value of your property and the outstanding debt on your home loan. For example, if Anna’s home is worth $500,000 and the current debt on her home loan is $320,000, then Anna has $180,000 worth of equity in her house.

In most instances, you need a 20% deposit to get a home loan to buy an investment property.

Therefore, if Anna uses $80,000 worth of equity as a deposit, she could purchase a $400,000 investment property – assuming she covers stamp duty and settlement fees with money she has saved, and she meets the necessary criteria to get the loan.

It’s possible to buy an investment property with a deposit lower than 20%, but you’ll most likely have to take out LMI. Lenders Mortgage Insurance (LMI) is a one-off, non-refundable, non-transferrable premium that’s added to your home loan.

Now let’s weigh the pros and cons:

Using equity is a great option to potentially secure a better interest rate and avoid paying LMI. Keep in mind that the property you’re taking equity from will become additional security for your new loan as well – we call this cross-collateralisation. This means that in the future, any decisions you make to one loan or property may impact the other.

For example, if you sell one property later, the money from the sale may be used to reduce your other loan. It all depends on the value of the property you’re keeping and how your remaining repayments might impact your situation.

Overall, we recommend using Equity to buy an investment property to help build your portfolio etc. Catering for your personal situation, we are here to help you find the right loans and finance your dream!

If you have any questions or would like to find out if you meet the criteria to purchase an investment property by using your equity, please call us on (03) 9078 6431 and we will be glad to assist you!