Using your home equity to buy an investment property
Before you start investigating the investment property market, there are three simple steps you’ll need to take to find out exactly how much you can afford to borrow and what you can buy.
Three simple steps to buy an investment property
If you already own a home and want to buy an investment property, you can use your home equity as a deposit. But before you start looking at which investment property to buy, there are three simple steps you’ll need to take to find out exactly how much you can afford to borrow and what you can buy.
Step 1: Use your home equity for the deposit
Your home equity is the difference between the current value of your home and the amount you still need to pay on your mortgage. For example, if you own a home valued at $750,000 and your outstanding mortgage is $300,000, your home equity will be $450,000. You can use some of this equity as the deposit to buy an investment property.
The key step is to determine what your own home is worth. You can get a rough guide using your own knowledge of the local real estate market. Alternatively, you could use tools provided by domain or allhomes. However, to find the exact amount of home equity you can leverage, you will need to get a formal property valuation. Milestone Lending can assist you with this process.
Step 2: Discuss how much you can borrow (and beware of LMI)
Your lender will have their own policies around how much you will be able to borrow. Lenders take into account living expenses, amounts owed on any existing mortgage, and your current income.
Remember, if you plan to borrow more than 80% of the value of your investment property, you will incur Lenders Mortgage Insurance (LMI). This is insurance for your lender if you’re unable to make your repayments in future. The cost of LMI varies depending on your loan amount, the value of your property and your lender. It is usually rolled into the total amount of your loan.
Step 3: Decide what you can afford to borrow
Once you know what your home equity is and what lenders will offer you, the next step is to decide how much you can realistically afford to borrow. This is where the advice of an experienced mortgage broker can help you make the best decision. They will consider financial factors including:
your short and long-term financial commitments
the ideal price range you should target for your investment property
how much you should borrow (not just how much your mortgage provider is willing to lend you)
your future financial goals and how your investment property could support them.
Tip: Remember the tax benefits
Don’t forget that the deposit on your investment property, along with the amount you borrow, may both be tax deductible. This means your investment property loan could be up to 100% tax deductible. This can be a huge benefit at the end of the financial year.