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What is home equity? Part 2

In Part 1, we discussed what is home equity, how to calculate your equity and 5 things to consider before you use it. Keep reading Part 2 to discover how you can use equity to purchase an investment property. 

How can I use equity to buy a second home?

Aside from refinancing, there are a few other options available to you that can give you access to your homes equity for the purpose of buying another property. Before getting started, it may be wise to use a few tools – like our MyChoice Home Loans financial calculators – to wrap your head around the borrowing power, how much it will cost to buy an investment property, as well as other resources like budget planners and stamp duty calculators.

Line of credit

Using equity through a line of credit is a common strategy for property investors. It’s a way for homeowners to access funds up to a predetermined limit based on the equity in their property. By going down the line-of-credit route, you can secure the necessary loan amount for a deposit of your second home.

Reverse mortgage

If you own your primary residence outright or have substantial equity, a reverse mortgage may be an option. This strategy means you can convert a portion of your home equity into cash, which can be used for property investment. The existing home loan is repaid when the borrower moves out, sells the home or passes away. Reverse mortgages are, however, subject to tight lending criteria, so speak to your local MyChoice Home Loans consultant or bank about whether this is a viable option.

Cross-collateralisation

Cross-collateralisation uses the equity in your existing home loan as collateral for the loan on your second house. It’s a financial strategy that ties both properties together. While this can make the loan process more streamlined, it also means that any default on one property will negatively impact the other.

Can I use equity to buy a house with no deposit?

The equity from your home is what can be used as a deposit for a second property. In other words, if you have enough equity in your existing home, then you can use this amount as the deposit for your new investment property – with many lenders allowing you to borrow up to 95% LVR on your own home and 90% on an investment property.

How does using equity to refinance affect my current home loan?

Refinancing with your equity involves replacing your existing home loan with a new one, often with better terms. Drawing on how each equity you have during refinancing can be a smart way to get additional funds. However, you’ll want to factor in any impact to your existing loan. While it can increase the overall debt secured by your property, it may also result in lower interest rates or better loan terms.

Make sure to speak to one of our MyChoice Home Loans consultants or tax professionals to make sure that any refinancing decisions you make align with your overarching financial goals and won’t jeopardise your current loan structure.

How to increase your home’s equity

Looking to build up your home’s equity so you can leverage more funds for a cash deposit on future investments? Here’s a few strategies to consider:

·       Home improvements: Improve the value of your home through strategic home improvements, renovations, extensions and more.

·       Market appreciation: Monitor market appreciate on homes in your area by staying informed about current trends.

·       Additional loan repayments: You may be able to make extra mortgage repayments to built equity in your home faster. Just make sure you won’t be financially penalised.

·       Maintain your property’s condition: Regular home maintenance and upkeep will help to preserve the value of your existing home.

·       Energy-efficient upgrades: You might consider investing in energy-efficient upgrades – such as solar panels or EV charging batteries that lower your utility bills while also making your property more attractive to buyers (and therefore more valuable).

Tips for investing in property

 

Investing in property can be a lucrative strategy – but only when done with plenty of research, professional advice and careful consideration. Before jumping into property investment, make sure you research local markets, consider long-term market trends, get tax advice from an expert or do your due diligence of using equity to buy.

What is home equity? Part 1

Home equity is a financial asset tied to your home – and one that can be used to your advantage in a few exciting ways. Beyond investing in your future, the equity you build up in your home can become a pool of potential value.

In simple terms, home equity is the difference between your homes market value and what you still owe on it. As your pay down your mortgage over the years, the equity builds up. It’s a big part of home ownership – but something that’s often overlooked. Here’s what you need to know about the basics of home equity, as well as how you can use it to potentially grow your wealth and property portfolio.

What is equity in a property?

Equity is a measure of your property ownership as it represents the ‘portion’ that belongs to you. It’s the difference between the market value and the outstanding mortgage balance. As you pay down your mortgage or your home appreciates in value, your equity goes up. Moreover, useable equity (also referred to as accessible equity) is the amount you can leverage for various purposes.

What can equity be used for?

You already know that you can use equity in your current home to invest in another property. But what you might not realise is that it can actually be used for a number of other things.

One common application is improving your home – using equity to renovate or upgrade your property can make a big boost to its overall value. Equity can also be an effective resource for financing major life events, such as a dream holiday or buying a new car.

One big advantage is that the interest rates on home equity loans or lines of credit are often lower than other forms of credit, resulting in long-term cost savings. Whether you’re looking to consolidate high-interest debt, invest in your kids’ future education, or fund a large purchase, tapping into your property’s useable equity can be a cost-effective strategy.

How can home equity help?

Taking advantage of your home equity to buy a second property can be a strategic financial move with several benefits:

·       It provides the means to expand your real estate portfolio, potentially growing your overall wealth and setting you up for a more comfortable retirement.

·       Using home equity for a second property can offer a few tax advantages, as mortgage interest payments could be tax-deductable in some circumstances.

·       By diversifying your investments, you are essentially ‘spreading out’ your level of financial risk across multiple assets.

·       Using the equity in your existing property means you can access better terms compared to other forms of credit. In other words: lower interest rates.

How to calculate home equity

Calculating the equity of your home is straightforward and involves subtracting your outstanding mortgage balance from the current market value of your property. Because property values tend to fluctuate, keeping an eye on your home loan equity is necessary when you are preparing to use it.

Start by getting an up-to-date property valuation, either through a professional appraiser or by using online property-valuation tools. Once you have this figure you can use the following calculation:

Home value – outstanding mortgage = equity

For example, if your property is valued at $1,000,000 and your outstanding mortgage is $800,000, your equity is $200,000.

5 things to consider before using your equity

1.      Interest rates: Do a bit of research into the interest rates that come with using your home equity and how they compare to other financial options.

2.      Loan terms: Always read the terms and conditions of equity-based loans, including repayment schedule and potential penalties for missed payments.

3.      Property value trends: What’s happening right now in the current property market? Consider the current and future trends of property values, as they might impact your decision to borrow additional funds.

4.      Your financial situation: Assess your overall financial stability to make sure you are matching your home-equity plans with your long-term financial goals and risk appetite.

 

5.      Impact on loan-to-value (LVR) ration: Find out how using your equity might affect your loan-to-value ratio. This can influence your eligibility for certain loans and lower interest rates.

To keep learning about home equity and how it can benefit you and your family, read part 2.

 

 

Can I use my super to build a house?

If you’ve been trying to achieve the great Australian Dream of home ownership but are struggling to build a sizeable deposit, there are some alternative ways to do it. If you’ve ever wondered whether you can leverage your retirement savings for something other than retiring, you’ll be happy to know you can now use your superannuation to build a house.

Here’s what you need to know to build a new home or buy house and land using your super – plus the potential pros and cons to consider.

Ways to build or buy property using your superannuation

You don’t need to be in your golden years to enjoy all the wealth you’ve accumulated in your superannuation account. On the contrary, the Australian government has made it easier than ever to put those before-tax contributions to good use in a number of different ways.

1.     First Home Super Saver (FHSS) Scheme

The First Home Super Saver (FHSS) Scheme allows eligible Australians to make voluntary contributions into their super to save for their first home. You can then apply to release these contributions, along with other earning, for your home deposit, provided you meet the eligibility criteria.

As with all government schemes, there are limits to the amount you can contribute and withdraw under the FHSS. That’s why you’ll need to stay across the latest guidelines from the Australian Tax Office (ATO), as well as speak to a financial advisor or tax agent to ensure any decisions you make are compliant under the scheme.

How does the First Home Super Saver Scheme work?

·       Voluntary contributions: If you are eligible, you can made additional voluntary contributions to your super fund, which are then earmarked under the FHSS scheme. These contributions can be salary sacrifice contributions or personal after-tax contributions for which a tax deduction is claimed.

·       Contribution limits: There are annual and total limits on the contributions you can make under this Scheme. For the 2024-25 financial year, for example, the maximum contributions allowed are $15,000 per financial year and $50,000 in total.

·       Request for release: Once you’ve made the contributions, you can apply to release these funds along with any other associated earnings to help fund your first home.

·       Eligibility criteria: To be eligible, you need to meet certain criteria, including being 18 years or older, never having owned a property in Australia and intending to live in the property as soon as possible.

·       Tax benefits: Contributions made under the FHSS scheme receive concessional tax treatment within your super fund. When released, the taxable portion is subject to a lower rate compared to your marginal tax rate.

·       Withdrawal process: After applying for a release, the ATO determines the amount that can be released and will instruct your super fund to make the payment. You will then need to sing a contract to begin the buying or building process within 12 months.

2.    You’ve reached preservation age

Are you a retiree looking to downsize into a brand new home in your dream location? You’re in luck!

Once you have reached what’s known as ‘preservation age’, you can access your superannuation for any reason. For most people, that means you’re in your 60s and retired, or after you turn 67 – even if you are still working.

With the funds you’ve accumulated in your super over decades of working, you can pour everything into finding the perfect plot of land and building the home of your dreams.

5 Benefits of accessing your super to build a house

1.      Access to helpful schemes: You can now access your super to build a house thanks to the FHSS scheme, which may also come with tax advantages and help you save for your first home.

2.      Tax benefits: Contributions made under the FHSS are taxed at a lower rate, which translates to potential tax savings compared to standard super contributions.

3.      Become a homeowner faster: Using your super can speed up your journey to homeownership, especially for first-time buyers.

4.      Personalise your dream home: Building a home rather than buying an existing property means you can customise your home to meet your lifestyle needs and tastes.

5.      Start building a portfolio: Directing your super toward property investment will diversify your portfolio and finally put you on the property ladder – with the potential for a long-term capital growth and financial security ahead.

3 potential negatives of using super to build a house

1.      Less for your retirement savings: Drawing from your super to build a house can dimmish your retirement savings. This may impact the overall nest egg you are planning to rely on during retirement.

2.      Impact on compound growth: The compounding effect of superannuation can be huge over several decades. Early withdrawals may interrupt this compounding growth and limit your potential wealth at retirement.

3.      Strict eligibility: Accessing your super to build a house involves meeting strict eligibility criteria.

Bring your dream home to life

 

Start making your super work for you – even before you hit retirement age – by using it to fund your dream new home. When you build with any home builder part of the NEX Building Group you will have exclusive access to MyChoice Home Loans. Our team will put you in the best lending position when we call on our relationships with some of Australia’s leading lenders. Why not use our borrowing capacity calculator to understand exactly where you are on the journey towards homeownership.  

7 tips for buying your first investment property

Buying an investment property can be a lucrative business, allowing you to generate decent cash flow when done right. However, there can be a lot to consider, especially if it’s your first investment property. Similar to buying your first home, it’s worth sitting down and figuring out your options before you jump into buying your first investment property. Here are the factors, and some challenges you should consider before you jump into the world of investment properties.

1.    Consider if you’re ready to be a property manager

There’s a lot more to being a landlord than taking your tenants rent every month. In fact, it can be a rather challenging job, requiring you to choose the right property, find reliable tenants, and keep up with the general wear and tear of the property.

It’s worth being handy on the tools, but if this isn’t an expertise of yours than you may consider hiring a property manager to handle those tasks for you. However, keep in mind that this will dip into your profits and should be factored in as another expense on top of buying your investment property.

2.    Understand cash flow

This is a very important for any investment property. Cash flow refers to the money that flows to and from your investment property. Whilst you will receive cash flow weekly when your tenants pay their rent, this cash will then flow out in order to pay things such as mortgage repayments, maintenance costs, rates, utilities, and strata or body corporate fees.

Speaking to our mortgage brokers at MyChoice Home Loans can be one of the smartest decisions you’ll make, as they can help you understand if you have the right budget for such a big investment. It is common over the first few years to experience a loss, especially if the rental income on the property is not enough to cover the mortgage and its running costs. It can take time to break even and then make a profit on an investment property, which is why it’s so important to understand cash flow.

3.    Secure an investment loan

Similar to what you may have experienced when you purchased your first home, your first investment property will generally require a loan to secure the property. Investment properties may require a larger deposit than owner-occupied properties and may have tighter approval requirements. Typically, you will need a 20% deposit to purchase an investment property and successfully take out an investment loan.

Chat to your local MyChoice Home Loans consultant in order to get the most out of your investment, making sure your investment loan works hard for you. Using our MATCH system, we can help you gain access to an array of lenders who will be able to help find the right loans for you.

4.    To build, or to buy?

Tossing up whether to build or buy your first investment property? The biggest difference will be the wait on rental income and cash flow. The sooner you can secure tenants for your property, the sooner you can start enjoying your investment income. It’s worth noting a brand new home not only meet all the modern-day requirements for your tenants, it may help to secure a higher weekly return.

5.    Focus on location

Where you choose to purchase or build your first investment property depends on the tenants you wish to target. For instance, young singles may want an apartment close to restaurants, retail facilities and night life, whereas families will want homes closer to great education precincts, parks and public transport facilities. Additionally, you may also wish to look at suburbs tipped for growth.

6.    Look for low maintenance property

You don’t want to be spending every weekend making repairs at your rental property, and to be fair your tenants probably don’t want you there every weekend either! This is why it’s important to consider a low maintenance property when buying your first investment property. A new home is ideal for investors, as an older property may require a lot of maintenance and will depreciation will reduce your profits.

7.    Consider the tenant

By considering the needs and wants of your tenants, you’ll be poised to make a savvy decision when it comes to choosing your first investment property. Whist tenants don’t typically get emotionally attached to a place they won’t be living in forever, they still appreciate a good kitchen and a nice bathroom, and air conditioning too!

Parking is also an important thing to consider. Look for new-home builds that offer two or more car spaces and wider streets for extra parking.

 

If you’re interested in securing your first investment property, contact your local MyChoice Home Loans consultant and book in for your obligation free financial review, and find out how we can secure you an investment property loan, your way. 

Switching Home Loans Made Easy.

There are many reasons you may be looking to refinance your home loan – maybe you’re coming off a fixed rate, looking to consolidate debts or need more flexibility in your loan. Whatever your motive, here’s what our expert consultants suggest considering before taking the plunge.

1.       What is it going to cost you?

Make sure you have clear understanding of the terms and conditions of your existing loan and the loan you’re looking to refinance to. This will allow you to factor in any fees that may come with the change, such as discharge fees, valuation fees and break costs.

If you’re not sure what terms and conditions apply to you, chat to your experienced MyChoice Home Loans consultant.

2.       What loan features would you like?

When refinancing make sure you consider the features you would like included in the home loan, such as a redraw facility or an offset account to help you pay down the loan quicker.

Your home loan consultant will help secure a home loan that is benefits your unique circumstances, whilst ensuring you benefit from the best deal available.  

3.       What are the term conditions?

Keep in mind that the home loan you are refinancing to may offer a lower interest rate but can add on another 15-30 years to pay off, ultimately increasing in the interest you’ll pay over the life of the loan.

4.       How flexible is the loan?

Make sure you discuss with your MyChoice Home Loans consultant if the new home loan you wish to apply for offers any relief or concessions, such as circumstances where the lender can provide financial relief support of your repayments if an eligible borrower, spouse, or dependant passes away or is medically certified with a terminal illness.

At MyChoice Home Loans we make refinancing your home loan easy, making the transition between loans stress free by using our relationships with some of Australia’s leading lenders to secure the best home loan tailored to meet your needs as they are today.

 

Optimise your home finances with a Refinance Home Loan from MyChoice Home Loans. Enquire now to talk to one of our consultants. 

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